Accounting versus Prudential Regulation

50 Pages Posted: 13 Nov 2018 Last revised: 1 Dec 2018

See all articles by Jeremy Bertomeu

Jeremy Bertomeu

University of California, San Diego (UCSD) - Rady School of Management

Lucas Mahieux

Tilburg University - Department of Accounting & Accountancy

Haresh Sapra

Booth School of Business, University of Chicago

Date Written: December 1, 2018

Abstract

We develop a model to study how accounting and prudential regulations interact to affect banks' incentives to originate safe loans. Prudential regulators impose prudential limits on bank leverage but cannot commit to ex-ante efficient intervention, responding ex-post to accounting information. Our main result is that accounting measurement and capital requirements are tools best used in tandem. We demonstrate how suitably designed measurements can help ease credit and we derive various comparative statics linking bank leverage, quality of accounting information, and regulatory intervention. An application of our analysis is on the current debate on the expected loss provisioning model recently adopted in the financial industry.

Keywords: Prudential Regulation, Accounting Standards, Loan Loss Provisioning

JEL Classification: G21, G28, M41, M48

Suggested Citation

Bertomeu, Jeremy and Mahieux, Lucas and Sapra, Haresh, Accounting versus Prudential Regulation (December 1, 2018). Available at SSRN: https://ssrn.com/abstract=3266348 or http://dx.doi.org/10.2139/ssrn.3266348

Jeremy Bertomeu

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Lucas Mahieux (Contact Author)

Tilburg University - Department of Accounting & Accountancy ( 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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