Asset Reclassifications and Bank Recapitalization during the Financial Crisis

62 Pages Posted: 23 Jun 2010 Last revised: 6 Jun 2019

See all articles by Jannis Bischof

Jannis Bischof

University of Mannheim - Accounting and Taxation

Ulf Brüggemann

Humboldt University of Berlin - School of Business and Economics

Holger Daske

University of Mannheim - Accounting and Taxation

Date Written: May 31, 2019

Abstract

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

Bischof, Jannis and Brüggemann, Ulf and Daske, Holger, Asset Reclassifications and Bank Recapitalization during the Financial Crisis (May 31, 2019). Available at SSRN: https://ssrn.com/abstract=1628843 or http://dx.doi.org/10.2139/ssrn.1628843

Jannis Bischof (Contact Author)

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

Ulf Brüggemann

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

Holger Daske

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

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