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Accounting discretion of banks during a financial crisis

2009-09-01 Business & Economics
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Release : 2009-09-01
Genre : Business & Economics
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Book Synopsis Accounting discretion of banks during a financial crisis by : Mr.Luc Laeven

Download or read book Accounting discretion of banks during a financial crisis written by Mr.Luc Laeven. This book was released on 2009-09-01. Available in PDF, EPUB and Kindle. Book excerpt: 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.

IMF Working Papers

2009 Electronic books
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Release : 2009
Genre : Electronic books
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Book Synopsis IMF Working Papers by : Luc Laeven

Download or read book IMF Working Papers written by Luc Laeven. This book was released on 2009. Available in PDF, EPUB and Kindle. Book excerpt:

The Relevance of Discretionary Loan Loss Provisions During the Financial Crisis

2019
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Release : 2019
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Book Synopsis The Relevance of Discretionary Loan Loss Provisions During the Financial Crisis by : Paul J. Beck

Download or read book The Relevance of Discretionary Loan Loss Provisions During the Financial Crisis written by Paul J. Beck. This book was released on 2019. Available in PDF, EPUB and Kindle. Book excerpt: Banks' use of accounting discretion in estimating loan loss provisions (LLPs) during the financial crisis has come under severe criticism. We argue, however, that it is during periods of instability like the financial crisis that accounting discretion is most relevant. We find that the discretionary component of LLPs exhibits dramatically stronger associations with contemporaneous stock returns and with subsequent realized loan losses during the crisis than in surrounding periods. We also find that discretionary LLPs are associated with the Treasury's allocation of TARP funds. Tests surrounding the TARP funding shock provided added validity to our empirical specifications. The significant beneficial role of discretion in LLPs during the financial crisis is especially important in light of the FASB's new accounting rules that are likely to alter the level of accounting discretion underlying these estimates.

Bank Earnings Management and Tail Risk During the Financial Crisis

2014
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Release : 2014
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Book Synopsis Bank Earnings Management and Tail Risk During the Financial Crisis by : Lee J. Cohen

Download or read book Bank Earnings Management and Tail Risk During the Financial Crisis written by Lee J. Cohen. This book was released on 2014. Available in PDF, EPUB and Kindle. Book excerpt: We show that a pattern of earnings management in bank financial statements has little bearing on downside risk during quiet periods, but seems to have a big impact during a financial crisis. More aggressive earnings managers prior to 2007 exhibit substantially higher risk once the financial crisis begins. This risk is evident in both the incidence of large weekly stock price “crashes” as well as in the pattern of full-year returns. Consistent with the literature on earnings management and crash risk in industrial firms, these results support the hypothesis that banks can use accounting discretion to hide relevant information for some time, but in a period of severe distress in which accounting choices can no longer obscure performance, information comes out in larger amounts, resulting in substantially worse stock market returns. We also show that these stock price crashes predict future deterioration in operating performance, which is of greater direct relevance to regulators, and thus may serve as an early warning signal of impending problems.

Accounting for Financial Stability

2018
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Release : 2018
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Book Synopsis Accounting for Financial Stability by : Jannis Bischof

Download or read book Accounting for Financial Stability written by Jannis Bischof. This book was released on 2018. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates what we can learn from the financial crisis about the link between accounting and financial stability. The picture that emerges ten years after the crisis is substantially different from the picture that dominated the accounting debate during and shortly after the crisis. Widespread claims about the role of fair-value (or mark-to-market) accounting in the crisis have been debunked. However, we identify several other core issues for the link between accounting and financial stability. Our analysis suggests that, going into the financial crisis, banks' disclosures about relevant risk exposures were relatively sparse. Such disclosures came later after major concerns about banks' exposures had arisen in markets. Similarly, banks delayed the recognition of loan losses. Banks' incentives seem to drive this evidence, suggesting that reporting discretion and enforcement deserve careful consideration. In addition, bank regulation through its interlinkage with financial accounting may have dampened banks' incentives for corrective actions. Our analysis illustrates that a number of serious challenges remain if accounting and financial reporting are to contribute to financial stability.

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