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Accounting discretion of banks during a financial crisis
Author:
Mr. Luc Laeven
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Harry Huizinga null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2009: Issue 207
Language:
English
Publication Date:
01 Sep 2009
DOI:
https://doi.org/10.5089/9781451873542.001
ISBN:
9781451873542
ISSN:
1018-5941
Pages:
41
Keywords:
WP; bank assets; market value; real estate; bank stock; banks report; zombie bank
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund