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 journalArticle

Abstract

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
Volume94
Issue number2
DOIs
StatePublished - Mar 2019

Fingerprint

Capital regulation
Capital requirements
Fair value
Fair value accounting
Assets
Historical cost
Lending
Accounting choice
Cost accounting
Capital adequacy requirement
Elasticity
Interaction
Value change
Bank loans
Accounting information
Asset value

Keywords

  • Banking
  • Capital requirement
  • Fair-value accounting

Cite this

Banks’ asset reporting frequency and capital regulation : An analysis of discretionary use of fair-value accounting. / Corona, Carlos; Nan, Lin; Zhang, Gaoqing.

In: Accounting Review, Vol. 94, No. 2, 03.2019, p. 157-178.

Research output: Contribution to journalArticle

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