Jannis Bischof

Christian Laux

Christian Leuz

University of Mannheim

Vienna University of Economics and Busines,VGSF and ECGI

University of Chicago, NBER and ECGI

Accounting for Financial Stability : Lessons from the Financial Crisis and Future Challenges


This paper investigates what we can learn from the financial crisis about the link between accounting and financial stability. The picture that emerges ten years after the crisis is substantially different from the picture that dominated the accounting debate during and shortly after the crisis. Widespread claims about the role of fair-value (or mark-to-market) accounting in the crisis have been debunked.

However, we identify several other core issues for the link between accounting and financial stability. Our analysis suggests that, going into the financial crisis, banks’ disclosures about relevant risk exposures were relatively sparse. Such disclosures came later after major concerns about banks’ exposures had arisen in markets. Similarly, banks delayed the recognition of loan losses. Banks’ incentives seem to drive this evidence, suggesting that reporting discretion and enforcement deserve careful consideration. In addition, bank regulation through its interlinkage with financial accounting may have dampened banks’ incentives for corrective actions. Our analysis illustrates that a number of serious challenges remain if accounting and financial reporting are to contribute to financial stability.


The 2008 financial crisis set off a major debate about the role of accounting for financial stability. Early in the crisis, policymakers and commentators made strong claims about fair-value or mark-to-market accounting (FVA), arguing it exacerbated the crisis by facilitating excessive leverage in booms and leading to contagion and downward spirals in busts. Later, the G20 raised concerns about banks’ accounting for loan losses and the incurred loss model, arguing it delays loss recognition and corrective actions by banks. There is also an ongoing debate on the role of prudential filters that shield regulatory capital from fair value (FV) changes of certain assets. For these debates, empirical evidence on the links between accounting and financial stability is important. We have since learned that FVA was largely a scapegoat; there is no evidence that it significantly contributed to the financial crisis or its severity. The claims were largely based on hypothetical links or models, rather than empirical facts.

However, the evidence on FVA does not imply that there were no problems with banks’ financial reporting more broadly. To the contrary, we highlight several problems that are central to the link between accounting and financial stability. Our analysis of banks’ financial reporting leading up to and during the financial crisis suggests issues related to disclosure and loss recognition that we should take seriously. In our view, the crisis provides a number of important lessons and points to several regulatory challenges going forward, including opportunities for future research. Our goal is to re-direct the debate on accounting issues that have received less attention, yet are central when it comes to the link between accounting, reporting and financial stability, i.e., disclosure, loan loss recognition, prudential filters, and the interaction of bank regulation and accounting choices.

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