Accounting discretion of banks during a financial crisis

Luc Laeven and Harry Huizinga

No 2009/207, IMF Working Papers from International Monetary Fund

Abstract: This paper shows that banks use accounting discretion to overstate the value of distressed assets. Banks' balance sheets overvalue real estate-related assets compared to the market value of these assets, especially during the U.S. mortgage crisis. Share prices of banks with large exposure to mortgage-backed securities also react favorably to recent changes in accounting rules that relax fair-value accounting, and these banks provision less for bad loans. Furthermore, distressed banks use discretion in the classification of mortgage-backed securities to inflate their books. Our results indicate that banks' balance sheets offer a distorted view of the financial health of the banks.

Keywords: WP; bank assets; market value; real estate; bank stock; banks report; zombie bank (search for similar items in EconPapers)
Pages: 41
Date: 2009-09-01
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Citations: View citations in EconPapers (41)

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Related works:
Working Paper: Accounting discretion of banks during a financial crisis (2009)
Working Paper: Accounting Discretion of Banks During a Financial Crisis (2009)
Working Paper: Accounting Discretion of Banks During a Financial Crisis (2009)
Working Paper: Accounting Discretion of Banks During a Financial Crisis (2009)
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