Description

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.

Taxonomy

Asset prices , Bank regulations , Banks and banking , Capital markets , Economic development , Financial crisis , Financial institutions and markets , International financial system , Investment

More publications in this series: Working Papers

More publications by: Luc Laeven ; Harry Huizinga