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Accounting Discretion of Banks During a Financial Crisis

Author/Editor: Huizinga, Harry | Laeven, Luc
Authorized for Distribution: September 1, 2009
Electronic Access: Free Full Text (PDF file size is 991KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: 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.
 
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Series: Working Paper No. 09/207
Subject(s): Accounting | Asset management | Asset prices | Bank accounting | Bank regulations | Banks | Financial crisis | Housing prices | Investment | Liquidity management | Real estate prices
Author's keyword(s): Key bank regulation | accounting standards | fair value accounting | corporate disclosure | financial crisis
 
English  
    Published:   September 1, 2009        
            Format:   Paper
    Stock No:   WPIEA2009207   Pages:   41
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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