Financial Reporting, Financial Regulation, and Financial Stability: Evidence from German Bank Failures in 2007-2008

37 Pages Posted: 24 Mar 2013 Last revised: 14 Jul 2015

See all articles by Oana Maria Georgescu

Oana Maria Georgescu

European Central Bank (ECB)

Christian Laux

Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF); European Corporate Governance Institute (ECGI)

Date Written: June 2015

Abstract

We investigate three prominent German bank failures in the financial crisis of 2007-2008, IKB Deutsche Industriebank, Landesbank Sachsen, and Hypo Real Estate (HRE). The cases provide a unique setting to analyze the interrelation between financial reporting, regulation, and financial stability. All three banks were regulated based on German local GAAP, not International Financial Reporting Standards (IFRS) even though IKB and HRE were required to publish reports based on IFRS. Thus, some of the most spectacular failures early in the crisis occurred for banks that were regulated based on historical cost accounting. Regulation based on historical cost did not prevent these banks from taking on very high leverage, and it did not result in an effective cushion in the crisis.

Keywords: Mark-to-market, Fair value accounting, Financial institutions, Financial crisis, Procyclicality

JEL Classification: G15, G21, G30, M41, M42

Suggested Citation

Georgescu, Oana Maria and Laux, Christian, Financial Reporting, Financial Regulation, and Financial Stability: Evidence from German Bank Failures in 2007-2008 (June 2015). Available at SSRN: https://ssrn.com/abstract=2238421 or http://dx.doi.org/10.2139/ssrn.2238421

Oana Maria Georgescu

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Christian Laux (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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