Accounting for Financial Stability: Lessons from the Financial Crisis and Future Challenges

Accounting for Financial Stability: Lessons from the Financial Crisis and Future Challenges

Jannis Bischof, Christian Laux, Christian Leuz

Series number :

Serial Number: 
445/2019

Date posted :

April 15 2019

Last revised :

April 13 2019
SSRN Share

Keywords

  • Banks • 
  • financial crisis • 
  • Mark-to-market • 
  • Fair value accounting • 
  • financial stability • 
  • Disclosure • 
  • Loan loss accounting

This paper investigates what we can learn from the financial crisis about the link between accounting and financial stability. The picture that emerges ten years after the crisis is substantially different from the picture that dominated the accounting debate during and shortly after the crisis.

Widespread claims about the role of fair-value (or mark-to-market) accounting in the crisis have been debunked. However, we identify several other core issues for the link between accounting
and financial stability. Our analysis suggests 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. Similarly, banks delayed the recognition of loan losses. Banks’ incentives seem to drive this evidence, suggesting that reporting discretion and enforcement deserve careful consideration. In addition, bank regulation through its interlinkage with financial accounting may have dampened banks’ incentives for corrective actions. Our analysis illustrates that a number of serious challenges remain if accounting and financial reporting are to contribute to financial stability.
 

Authors

Real name:
Jannis Bischof
Fellow, Research Member
The University of Chicago - Booth School of Business