Interplay between Accounting and Prudential Regulation
66 Pages Posted: 13 Nov 2018 Last revised: 2 Sep 2020
Date Written: September 1, 2020
We develop a model in which accounting information and prudential regulation interact to affect banks' incentives to originate loans. Prudential regulators impose capital requirements on banks but cannot commit to ex-ante efficient intervention. Instead, they respond to ex-post accounting information. We show that accounting measurement and capital requirements are complementary tools that affect the level and efficiency of credit decisions. Comparative statics link capital requirement, quality of accounting information, and regulatory intervention to credit market conditions. An application is to the current debate on the expected loss provisioning model recently adopted in the financial industry.
Keywords: Prudential Regulation, Accounting Standards, Capital Requirements, Loan Loss Provisioning
JEL Classification: G21, G28, M41, M48
Suggested Citation: Suggested Citation