Asset Reclassifications and Bank Recapitalization during the Financial Crisis
62 Pages Posted: 23 Jun 2010 Last revised: 6 Jun 2019
Date Written: May 31, 2019
EU politicians pressured the IASB to change the accounting rules for financial assets at the peak of the financial crisis in October 2008. The new rules enabled banks to forgo the recognition of unrealized fair value losses through reclassifications. This paper puts the ensuing regulatory relief for banks into perspective. We find that banks use asset reclassifications as a substitute to other discretionary but less visible accounting choices that have a similar impact on regulatory capital (e.g., loan loss provisions). At the same time, asset reclassifications complement real capital measures that tend to be substantially larger in magnitude (e.g., capital injections). We observe negative stock returns and increased bid-ask spreads following banks’ reclassification announcements. Consistent with a trade-off between these costs and the regulatory benefits, return reactions are muted if the reclassification helps a bank avoid regulatory capital reductions. In contrast, the increase in bid-ask spreads is larger for banks that provide incomplete disclosures about their reclassification choice.
Keywords: Bank Regulation, Regulatory Capital, Fair Value Accounting, Financial Crisis, IAS 39
JEL Classification: G14, G21, G28, M41, M48
Suggested Citation: Suggested Citation