Journal of Financial Economics Vol. 106 No. 3 2012
Bank valuation and accounting discretion during a financial crisis
Abstract
This paper shows that banks overstate the value of distressed assets and their regulatory capital during the US mortgage crisis. Real estate-related assets are overvalued in banks' balance sheets, especially those of bigger banks, compared to the market value of these assets. Banks with large exposure to mortgage-backed securities also provision less for bad loans. Furthermore, distressed banks use discretion over 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 and provide suggestive evidence of regulatory forbearance and noncompliance with accounting rules.
- DOI
- 10.1016/j.jfineco.2012.06.008
- Volume
- 106
- Issue
- 3
- Pages
- 614-634
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref