Asset reclassifications and bank recapitalization during the financial crisis


Bischof, Jannis ; Brüggemann, Ulf ; Daske, Holger


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DOI: https://doi.org/10.1287/mnsc.2022.4364
Additional URL: https://pubsonline.informs.org/doi/abs/10.1287/mns...
URN: urn:nbn:de:bsz:180-madoc-621363
Document Type: Article
Year of publication Online: 2022
Date: 5 April 2022
The title of a journal, publication series: Management Science
Volume: tba
Issue number: tba
Page range: 1-26
Place of publication: Cantonsville, MD
Publishing house: INFORMS
ISSN: 0025-1909 , 1526-5501
Publication language: English
Institution: Business School > ABWL u. Unternehmensrechnung (Bischof 2015-)
Business School > ABWL, Unternehmensrechnung u. Empirische Kapitalmarktforschung (Daske 2007-)
Pre-existing license: Creative Commons Attribution, Non-Commercial, Share Alike 4.0 International (CC BY-NC-SA 4.0)
Subject: 330 Economics
Keywords (English): bank regulation , financial crisis , fair value accounting , IFRS , regulatory capital , recapitalization
Abstract: Regulators frequently relax accounting rules during afinancial crisis as a meansof regulatory forbearance. The new accounting options provide banks with an opportunityfor an accrual-based increase in their regulatory capital. The use of such an accountingoption helps reduce the costs of government interventions such as bailouts and avoidthe dilution of existing shareholders’ownership rights. We examine the introduction of thereclassification option forfinancial assets during the 2008financial crisis and study the posi-tion of accrual-based options in the pecking order of banks’recapitalization measures. Thefindings suggest that the accrual-based increase in regulatory capital is temporary and doesnot 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 capitalincrease and a liquidity injection, they continue to suffer from low capitalization andfinancial difficulties in the following years. Ultimately, government interventions in accountingregulation 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.
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