Banks’ Financial Reporting and Financial System Stability

Posted: 24 Jun 2016

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: May 1, 2016

Abstract

The use of accounting measures and disclosures in banks’ contracts and regulation suggests that the quality of banks’ financial reporting is central to the efficacy of market discipline and nonmarket mechanisms in limiting banks’ development of debt and risk overhangs in economic good times and in mitigating the adverse consequences of those overhangs for the stability of the financial system in downturns. This essay examines how research on banks’ financial reporting, informed by the financial economics literature on banking, can generate insights about how to enhance the stability of the financial system. We begin with a foundational discussion of how aspects of banks’ accounting and disclosures may affect stability. We then evaluate representative papers in the empirical literature on banks’ financial reporting and stability, pointing out the research design issues that empirical accounting researchers need to confront to develop well-specified tests able to generate reliably interpretable findings. To this end, we provide examples of settings amenable to addressing these issues. We conclude with considerations for accounting standard setters and financial system policy makers.

Keywords: banks; financial reporting; financial system;stability; opacity; provision for loan losses; fair value accounting; amortized cost accounting

JEL Classification: G01; G21; G28; M41; M48

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Ryan, Stephen G., Banks’ Financial Reporting and Financial System Stability (May 1, 2016). Journal of Accounting Research, Vol. 54, No. 2, 2016, Available at SSRN: https://ssrn.com/abstract=2799339

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business ( email )

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New York University (NYU) - Department of Finance ( email )

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Stephen G. Ryan (Contact Author)

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