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ReferenceTitleLink
Huizinga, H. and Laeven, L. (2010)Bank Valuation and Regulatory Forbearance During a Financial Crisishere

Abstract

"This paper shows that banks overstate the value of distressed assets and their regulatory capital during the U.S. mortgage crisis. Banks’ balance sheets overvalue real estate-related assets 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 capital forbearance."


Additional Nematrian Commentary

They argue that during the 2007-09 Credit Crisis banks typically overstated the value of distressed assets they held, resulting in a more favourable capital position than would otherwise have been the case. In a sense, therefore, they benefited from some regulatory forbearance, which with the benefit of hindsight proved appropriate but if the crisis had not resolved itself could have led to even larger challenges further down the time line.


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