Asset Reclassifications and Bank Recapitalization during the Financial Crisis

Management Science, forthcoming: https://doi.org/10.1287/mnsc.2022.4364

69 Pages Posted: 7 Jul 2022

See all articles by Jannis Bischof

Jannis Bischof

University of Mannheim - Accounting and Taxation

Ulf Brüggemann

Humboldt University of Berlin - School of Business and Economics; TRR 266 Accounting for Transparency

Holger Daske

University of Mannheim

Multiple version iconThere are 2 versions of this paper

Date Written: April 5, 2022

Abstract

Regulators frequently relax accounting rules during a financial crisis as a means of regulatory forbearance. The new accounting options provide banks with an opportunity for an accrual-based increase in their regulatory capital. The use of such an accounting option helps reduce the costs of government interventions such as bailouts and avoid the dilution of existing shareholders’ ownership rights. We examine the introduction of the reclassification option for financial assets during the 2008 financial crisis and study the position of accrual-based options in the pecking order of banks’ recapitalization measures. The findings suggest that the accruals-based increase in regulatory capital is temporary and does not provide permanent relief. Consistent with the long-term costs of accrual-based measures, investors perceive the accounting choice as a negative signal. If banks do not complement their use of the accounting option by other corrective actions that result in a real capital increase and a liquidity injection, they continue to suffer from low capitalization and financial difficulties in the following years. Ultimately, government interventions in accounting regulation are unlikely to offer a sustainable solution to capital shortfalls in the banking sector if they are not supported by the concurrent enforcement of real corrective actions.

Keywords: Bank Regulation, Fair Value Accounting, Financial Crisis, Recapitalization, Reclassifications, Regulatory Capital

JEL Classification: G14, G21, G28, M41, M48

Suggested Citation

Bischof, Jannis and Brüggemann, Ulf and Daske, Holger, Asset Reclassifications and Bank Recapitalization during the Financial Crisis (April 5, 2022). Management Science, forthcoming: https://doi.org/10.1287/mnsc.2022.4364, Available at SSRN: https://ssrn.com/abstract=4116099

Jannis Bischof (Contact Author)

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

Ulf Brüggemann

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

Holger Daske

University of Mannheim ( email )

Mannheim, 68131
Germany

HOME PAGE: http://https://www.bwl.uni-mannheim.de/en/daske/

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