Accounting Discretion of Banks During a Financial Crisis

Download or read book Accounting Discretion of Banks During a Financial Crisis written by Mr. Luc Laeven and published by International Monetary Fund. This book was released on 2009-09-01 with total page 44 pages. 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.