Bank Valuation and Regulatory Forbearance During a Financial Crisis
Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR)
International Monetary Fund (IMF); Centre for Economic Policy Research (CEPR)
March 22, 2010
European Banking Center Discussion Paper No. 2009-17
CentER Discussion Paper Series No. 2009-58
This paper shows that banks overstate the value of distressed assets and their regulatory capital during the U.S. mortgage crisis. Banks’ balance sheets overvalue real estate-related assets 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 capital forbearance.
Number of Pages in PDF File: 42
Keywords: financial regulation, corporate disclosure, asymmetric information, regulatory forbearance, banking, financial crisis
JEL Classification: G14, G21working papers series
Date posted: July 18, 2009 ; Last revised: March 23, 2010
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