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Accounting discretion of banks during a financial crisis

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  • Mr. Luc Laeven
  • Harry Huizinga

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.

Suggested Citation

  • Mr. Luc Laeven & Harry Huizinga, 2009. "Accounting discretion of banks during a financial crisis," IMF Working Papers 2009/207, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2009/207
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    More about this item

    Keywords

    WP; bank assets; market value; real estate; bank stock; banks report; zombie bank;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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