The Effect of the Balance Sheet Approach on the Usefulness of Accounting Information in Assessing Bank Default Risk

57 Pages Posted: 19 Apr 2021 Last revised: 25 Apr 2021

See all articles by Peter R. Demerjian

Peter R. Demerjian

School of Accountancy, J. Mack Robinson College of Business, Georgia State University; University of Illinois at Chicago

Kodai Ito

Mizuho-DL Financial Technology Co., Ltd.

Akinobu Shuto

University of Tokyo - Graduate School of Economics

Date Written: March 31, 2021

Abstract

This study investigates the effect of the balance sheet approach, where financial reporting focuses on asset and liability valuation, on the usefulness of the capital adequacy ratio in the evaluation of bank default risk by credit rating agencies. We examine Japanese banks, which play the central role in the Japanese economy, and whose capital adequacy ratios are affected by the fair value measurement under the balance sheet approach. We adopt Demerjian’s (2011) approach to develop a bank-level measure of balance sheet focus. Although we find a significant positive correlation between the slack of the regulatory capital adequacy ratio and issuer rating, we find that this positive correlation is significantly weakened as a bank’s dependence on the balance sheet approach increases. The results suggest that the regulatory capital adequacy ratio based on a bank’s accounting information provides useful information for the evaluation of default risk but that rating agencies discount capital information that relies heavily on the balance sheet approach when estimating a bank’s default risk.

Keywords: balance sheet approach, regulatory capital adequacy ratio, bank regulation, rating

JEL Classification: M41

Suggested Citation

Demerjian, Peter R. and Ito, Kodai and Shuto, Akinobu, The Effect of the Balance Sheet Approach on the Usefulness of Accounting Information in Assessing Bank Default Risk (March 31, 2021). Available at SSRN: https://ssrn.com/abstract=3828678 or http://dx.doi.org/10.2139/ssrn.3828678

Peter R. Demerjian

School of Accountancy, J. Mack Robinson College of Business, Georgia State University ( email )

GA
United States

University of Illinois at Chicago ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States

Kodai Ito

Mizuho-DL Financial Technology Co., Ltd. ( email )

1-8-2
Marunouchi
Chiyoda-ku, Tokyo 100-0005
Japan

Akinobu Shuto (Contact Author)

University of Tokyo - Graduate School of Economics ( email )

Hongo, 7-3-1
Bunkyo-ku
Tokyo, 1130033
Japan

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
131
Abstract Views
668
rank
297,082
PlumX Metrics