Bank valuation and accounting discretion during a financial crisis

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180 Citations (Scopus)


This paper shows that banks overstate the value of distressed assets and their regulatory capital during the US mortgage crisis. Real estate-related assets are overvalued in banks' balance sheets, especially those of bigger banks, compared to the market value of these assets. Banks with large exposure to mortgage-backed securities also provision less for bad loans. Furthermore, distressed banks use discretion over the classification of mortgage-backed securities to inflate their books. Our results indicate that banks' balance sheets offer a distorted view of the financial health of the banks and provide suggestive evidence of regulatory forbearance and noncompliance with accounting rules.
Original languageEnglish
Pages (from-to)614-634
JournalJournal of Financial Economics
Issue number3
Publication statusPublished - 2012


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