Transparency, Accounting Discretion and Bank Stability
42 Pages Posted: 30 Jun 2015
Date Written: June 28, 2015
An important unresolved issue is the extent to which bank transparency promotes or undermines bank stability. Conflicting views on transparency create a demand for empirical research that can provide insights into the nature of transparency and when, where and how it positively or negatively affects bank stability. Financial accounting information is an integral component of transparency and as such is a powerful point of entry for empirical investigations of bank transparency. This paper discusses key insights from recent research that investigates relations between bank transparency as viewed through the lens of financial accounting and bank stability. The paper focuses on real consequences of accounting policy choices on individual bank downside tail risk, codependence of tail risk among banks, and regulatory forbearance. I emphasize the role played by managerial discretion over accounting decisions in influencing bank stability through two distinct accounting channels: bank transparency and the role of accounting numbers as numerical inputs into the calculations of regulatory ratios such as bank capital ratios. Suggestions for future research are provided.
Keywords: Banking; Accounting discretion; Bank transparency; Bank risk
JEL Classification: E58; G21; G32; M41
Suggested Citation: Suggested Citation