Mr.Luc Laeven

Harry Huizinga

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.

Accounting discretion of banks during a financial crisis

Alberto Martin

Mr.Giovanni Dell'Ariccia

Alex Popov

Nigel Jenkinson

Caio Ferreira

Ms.Camelia Minoiu

This paper reviews empirical and theoretical work on the links between banks and their governments (the bank-sovereign nexus). How significant is this nexus? What do we know about it? To what extent is it a source of concern? What is the role of policy intervention? The paper concludes with a review of recent policy proposals.

Managing the Sovereign-Bank Nexus

Mr.Luc Laeven

Books

Your next favorite book is out there