Accounting for Financial Stability: Lessons from the Financial Crisis and Future Challenges

80 Pages Posted: 2 Feb 2019 Last revised: 14 Apr 2019

See all articles by Jannis Bischof

Jannis Bischof

University of Mannheim - Accounting and Taxation

Christian Laux

Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF); European Corporate Governance Institute (ECGI)

Christian Leuz

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network

Date Written: December 1, 2018

Abstract

This paper investigates what we can learn from the financial crisis about the link between accounting and financial stability. The picture that emerges ten years after the crisis is substantially different from the picture that dominated the accounting debate during and shortly after the crisis. Widespread claims about the role of fair-value (or mark-to-market) accounting in the crisis have been debunked. However, we identify several other core issues for the link between accounting and financial stability. Our analysis suggests that, going into the financial crisis, banks’ disclosures about relevant risk exposures were relatively sparse. Such disclosures came later after major concerns about banks’ exposures had arisen in markets. Similarly, banks delayed the recognition of loan losses. Banks’ incentives seem to drive this evidence, suggesting that reporting discretion and enforcement deserve careful consideration. In addition, bank regulation through its interlinkage with financial accounting may have dampened banks’ incentives for corrective actions. Our analysis illustrates that a number of serious challenges remain if accounting and financial reporting are to contribute to financial stability.

Keywords: Banks, Financial Crisis, Mark-to-Market, Fair Value Accounting, Financial Stability, Disclosure, Loan Loss Accounting

JEL Classification: G21, G22, G28, G32, G38, K22, M41, M42, M48

Suggested Citation

Bischof, Jannis and Laux, Christian and Leuz, Christian, Accounting for Financial Stability: Lessons from the Financial Crisis and Future Challenges (December 1, 2018). European Corporate Governance Institute (ECGI) - Law Working Paper No. 445/2019. Available at SSRN: https://ssrn.com/abstract=3319542 or http://dx.doi.org/10.2139/ssrn.3319542

Jannis Bischof

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

Christian Laux

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Christian Leuz (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-1996 (Phone)

HOME PAGE: http://faculty.chicagobooth.edu/christian.leuz/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org

European Corporate Governance Institute (ECGI)

Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

University of Pennsylvania - Wharton Financial Institutions Center

3641 Locust Walk
Philadelphia, PA 19104-6218
United States

CESifo Research Network

Poschinger Str. 5
Munich, DE-81679
Germany

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