Interplay between Accounting and Prudential Regulation

66 Pages Posted: 13 Nov 2018 Last revised: 2 Sep 2020

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: September 1, 2020

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 on banks but cannot commit to ex-ante efficient intervention. Instead, they respond to ex-post accounting information. We show that accounting measurement and capital requirements are complementary tools that affect the level and efficiency of credit decisions. Comparative statics link capital requirement, quality of accounting information, and regulatory intervention to credit market conditions. An application is to the current debate on the expected loss provisioning model recently adopted in the financial industry.

Keywords: Prudential Regulation, Accounting Standards, Capital Requirements, Loan Loss Provisioning

JEL Classification: G21, G28, M41, M48

Suggested Citation

Bertomeu, Jeremy and Mahieux, Lucas and Sapra, Haresh, Interplay between Accounting and Prudential Regulation (September 1, 2020). 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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