Asset Reclassifications and Bank Recapitalization During the Financial Crisis

Jannis Bischof (), Ulf Brüggemann () and Holger Daske ()
Additional contact information
Jannis Bischof: Chair of Business Administration and Accounting, University of Mannheim, 68161 Mannheim, Germany
Ulf Brüggemann: Institute of Accounting and Auditing, School of Business and Economics, Humboldt-Universität zu Berlin, 10099 Berlin, Germany
Holger Daske: Chair of Accounting and Capital Markets, University of Mannheim, 68161 Mannheim, Germany

Management Science, 2023, vol. 69, issue 1, 75-100

Abstract: Regulators frequently relax accounting rules during a financial crisis as a means of regulatory forbearance. The new accounting options provide banks with an opportunity for an accrual-based increase in their regulatory capital. The use of such an accounting option helps reduce the costs of government interventions such as bailouts and avoid the dilution of existing shareholders’ ownership rights. We examine the introduction of the reclassification option for financial assets during the 2008 financial crisis and study the position of accrual-based options in the pecking order of banks’ recapitalization measures. The findings suggest that the accrual-based increase in regulatory capital is temporary and does not provide permanent relief. Consistent with the long-term costs of accrual-based measures, investors perceive the accounting choice as a negative signal. If banks do not complement their use of the accounting option by other corrective actions that result in a real capital increase and a liquidity injection, they continue to suffer from low capitalization and financial difficulties in the following years. Ultimately, government interventions in accounting regulation are unlikely to offer a sustainable solution to capital shortfalls in the banking sector if they are not supported by the concurrent enforcement of real corrective actions.

Keywords: bank regulation; fair value accounting; financial crisis; IFRS; recapitalization; regulatory capital (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2022.4364 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:1:p:75-100

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().