ORCID
Jeremy Bertomeu, https://orcid.org/0000-0001-6746-5767
Language
English (en)
Publication Date
2021
Abstract
We develop a model in which accounting information and prudential regulation interact to affect banks’ incentives to originate loans. Prudential regulators impose capital requirements to prevent banks from taking excessive risk. However, regula- tors cannot commit to ex-ante efficient intervention and, instead, respond to ex-post accounting information. We show that capital requirements and accounting mea- surement are substitutes when considered separately. By contrast, when considered jointly, accounting measurement and capital requirements are complementary tools that affect the level and efficiency of credit decisions. Comparative statics link cap- ital requirements, quality of accounting information, and regulatory intervention to credit market conditions. An upshot of our analysis is that by appropriately opti- mizing the information from expected loss models, prudential regulators may design looser capital requirements to spur more bank lending.
Document Type
Working Paper
DOI
https://doi.org/10.7936/wv5q-4q42
Author's Department
Accounting
Recommended Citation
Bertomeu, Jeremy; Mahieux, Lucas; and Sapra, Haresh, "Interplay Between Accounting and Prudential Regulation" (2021). Olin Business School Faculty Research. 24.
https://openscholarship.wustl.edu/business_facpubs/24