Bank Valuation and Regulatory Forbearance During a Financial Crisis

European Banking Center Discussion Paper No. 2009-17

CentER Discussion Paper Series No. 2009-58

42 Pages Posted: 18 Jul 2009 Last revised: 23 Mar 2010

See all articles by Harry Huizinga

Harry Huizinga

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR)

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: March 22, 2010

Abstract

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.

Keywords: financial regulation, corporate disclosure, asymmetric information, regulatory forbearance, banking, financial crisis

JEL Classification: G14, G21

Suggested Citation

Huizinga, Harry and Laeven, Luc A., Bank Valuation and Regulatory Forbearance During a Financial Crisis (March 22, 2010). European Banking Center Discussion Paper No. 2009-17. Available at SSRN: https://ssrn.com/abstract=1434359 or http://dx.doi.org/10.2139/ssrn.1434359

Harry Huizinga (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2623 (Phone)
+31 13 466 3042 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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