Accounting for Financial Stability: Bank Disclosure and Loss Recognition in the Financial Crisis

93 Pages Posted: 10 Jun 2019 Last revised: 28 Mar 2023

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); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Leibniz Institute SAFE; CESifo Research Network; Center for Financial Studies (CFS)

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Date Written: July 1, 2020

Abstract

This paper examines banks’ disclosures and loss recognition in the 2007-2009 financial crisis and identifies several core issues for the link between accounting and financial stability. We show 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. The recognition of loan losses also was slow and delayed relative to prevailing market expectations. Among the possible explanations for this evidence, our analysis indicates that banks’ reporting incentives played a key role, which has important implications for bank supervision and the new expected loss model for loan accounting. We also provide evidence that shielding regulatory capital from accounting losses through prudential filters can dampen banks’ incentives for corrective actions. Overall, our analysis reveals several significant challenges if accounting and financial reporting are to contribute to financial stability.

Keywords: Banks, Financial crisis, Financial stability, Disclosure, Loan loss accounting, Expected credit losses, Incurred loss model, Prudential filter, Fair value 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: Bank Disclosure and Loss Recognition in the Financial Crisis (July 1, 2020). CFS Working Paper, No. 622, 2019, TRR 266 Accounting for Transparency Working Paper Series No. 32, Available at SSRN: https://ssrn.com/abstract=3393148 or http://dx.doi.org/10.2139/ssrn.3393148

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 the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI)

Brussels
Belgium

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

Leibniz Institute SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

CESifo Research Network

Poschinger Str. 5
Munich, DE-81679
Germany

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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