Banks’ asset reporting frequency and capital regulation: An analysis of discretionary use of fair-value accounting

Carlos Corona, Lin Nan, Gaoqing Zhang

Research output: Contribution to journalArticlepeer-review

3 Scopus citations


This paper examines banks’ choice between fair-value and historical-cost accounting when reported accounting information is used in capital requirement regulation. We center our analysis on a key difference between fair-value and historical-cost accounting: the frequency with which asset value changes are reported. We show that the elasticity of banks’ loan returns to aggregate lending is a critical determinant of the interaction between capital adequacy requirements and accounting choices. If lending returns are inelastic, then higher capital requirements reduce fair-value usage. By contrast, higher capital requirements encourage fair value if capital requirements are low and lending returns are sufficiently elastic. In equilibrium, banks may elect different accounting choices, and we find that mandating uniform adoption of historical cost (fair value) is desirable when capital requirements are loose (tight). Our study offers many other implications about fundamental links between accounting and prudential choices.

Original languageEnglish (US)
Pages (from-to)157-178
Number of pages22
JournalAccounting Review
Issue number2
StatePublished - Mar 2019

Bibliographical note

Funding Information:
We thank Thomas Hemmer (editor) and two anonymous reviewers for helpful suggestions. We also thank for the comments from Anne Beyer, Judson Caskey, and participants at the 2013 Carnegie Mellon University Accounting Conference, 2013 Junior Accounting Theorists Conference, 2013 American Accounting Association Annual Meeting, 2013 FARS Midyear Meeting, IESE Business School, University of Navarra, and Pompeu Fabra University.

Publisher Copyright:
© 2019 American Accounting Association. All Rights Reserved.


  • Banking
  • Capital requirement
  • Fair-value accounting


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