Bank Valuation and Regulatory Forbearance During a Financial Crisis
CentER Discussion Paper Series No. 2009-58
42 Pages Posted: 18 Jul 2009 Last revised: 23 Mar 2010
Date Written: March 22, 2010
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: Suggested Citation