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Asset Reclassifications and Bank Recapitalization During the Financial Crisis

Author

Listed:
  • Jannis Bischof

    (Chair of Business Administration and Accounting, University of Mannheim, 68161 Mannheim, Germany)

  • Ulf Brüggemann

    (Institute of Accounting and Auditing, School of Business and Economics, Humboldt-Universität zu Berlin, 10099 Berlin, Germany)

  • Holger Daske

    (Chair of Accounting and Capital Markets, University of Mannheim, 68161 Mannheim, Germany)

Abstract
Regulators frequently relax accounting rules during a financial crisis as a means of regulatory forbearance. The new accounting options provide banks with an opportunity for an accrual-based increase in their regulatory capital. The use of such an accounting option helps reduce the costs of government interventions such as bailouts and avoid the dilution of existing shareholders’ ownership rights. We examine the introduction of the reclassification option for financial assets during the 2008 financial crisis and study the position of accrual-based options in the pecking order of banks’ recapitalization measures. The findings suggest that the accrual-based increase in regulatory capital is temporary and does not 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 capital increase and a liquidity injection, they continue to suffer from low capitalization and financial difficulties in the following years. Ultimately, government interventions in accounting regulation 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.

Suggested Citation

  • Jannis Bischof & Ulf Brüggemann & Holger Daske, 2023. "Asset Reclassifications and Bank Recapitalization During the Financial Crisis," Management Science, INFORMS, vol. 69(1), pages 75-100, January.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:1:p:75-100
    DOI: 10.1287/mnsc.2022.4364
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    References listed on IDEAS

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    Cited by:

    1. Lee, Eugenia Y. & Kim, Young Jun & Lee, Sangyoon, 2023. "Fair value information and regulatory capital management using financial asset reclassification by Korean insurers," Finance Research Letters, Elsevier, vol. 56(C).

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