Thoughts on Financial Accounting and the Banking Industry

Journal of Accounting and Economics 2014, 58, 384-395

40 Pages Posted: 16 Nov 2014 Last revised: 16 May 2016

See all articles by Robert M. Bushman

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School

Date Written: September 15, 2014

Abstract

Complementing the recent review of the banking literature in accounting by Beatty and Liao (2014), I offer my own thoughts on the role of financial accounting in banking. I focus my discussion on real effects of accounting policy choices on individual bank risk taking and codependence of risk among banks. I emphasize the role played by managerial discretion over accounting decisions in influencing bank stability through two distinct accounting channels: accounting numbers as numerical quantities and bank transparency. Accounting policy can affect bank stability through its influence over the accounting numbers as quantitative inputs into numerical calculations of regulatory covenants such as bank capital and leverage ratios. Accounting policy choices can also affect bank transparency which can impact bank stability by influencing the intensity of market monitoring of bank risk-taking, the extent of financing frictions facing banks, and banks’ opportunities to engage in risk-shifting activities. I also offer ideas on future research directions.

Keywords: Banking; Accounting discretion; Bank transparency; Bank risk

JEL Classification: E58; G21; G32; M41

Suggested Citation

Bushman, Robert M., Thoughts on Financial Accounting and the Banking Industry (September 15, 2014). Journal of Accounting and Economics 2014, 58, 384-395. Available at SSRN: https://ssrn.com/abstract=2523982 or http://dx.doi.org/10.2139/ssrn.2523982

Robert M. Bushman (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-9809 (Phone)

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/bushmanr/

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