Interplay between Accounting and Prudential Regulation

The Accounting Review

47 Pages Posted: 13 Nov 2018 Last revised: 17 May 2022

See all articles by Jeremy Bertomeu

Jeremy Bertomeu

Washington University in St. Louis - John M. Olin Business School

Lucas Mahieux

Tilburg University - Tilburg University School of Economics and Management

Haresh Sapra

Booth School of Business, University of Chicago

Date Written: February 14, 2022

Abstract

We develop a model in which accounting information and prudential regulation interact to affect banks' incentives to originate loans. Prudential regulators impose capital requirements to prevent banks from taking excessive risk. However, regulators cannot commit to ex-ante efficient intervention and, instead, respond to ex-post accounting information. We show that capital requirements and accounting measurement are substitutes when considered separately. By contrast, when considered jointly, accounting measurement and capital requirements are complementary tools that affect the level and efficiency of credit decisions. Comparative statics link capital requirements, quality of accounting information, and regulatory intervention to credit market conditions. An upshot of our analysis is that by appropriately optimizing the information from expected loss models, prudential regulators may design looser capital requirements to spur more bank lending.

Keywords: Accounting Standards; Prudential Regulation, Capital Requirements, Expected Loss Models, Loan Loss Provisioning Rules

JEL Classification: G21, G28, M41, M48

Suggested Citation

Bertomeu, Jeremy and Mahieux, Lucas and Sapra, Haresh, Interplay between Accounting and Prudential Regulation (February 14, 2022). The Accounting Review, Available at SSRN: https://ssrn.com/abstract=3266348 or http://dx.doi.org/10.2139/ssrn.3266348

Jeremy Bertomeu

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Lucas Mahieux (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Haresh Sapra

Booth School of Business, University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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