Post by alanbond on Jun 11, 2016 23:11:43 GMT 4
Opaque Bank Assets and Optimal Equity Capital
Min Dai
National University of Singapore (NUS) - Department of Mathematics
Shan Huang
National University of Singapore (NUS)
Jussi Keppo
National University of Singapore - NUS Business School
June 1, 2016
Abstract:
Banks' assets are opaque, and therefore, we model their true accounting asset values as partially observed variables. We derive a stochastic control model for this situation and calibrate that to a sample of U.S. banks. By the calibrated model, the noise in reported accounting asset values hides about one-third of the true asset return volatility and raises the banks' market equity value by 4.2% because the noise hides the banks' solvency risk from banking regulators. Particularly, those banks with a high level of loan loss provisions, nonperforming assets, and real estate loans, and with a low volatility of reported total assets have noisy accounting asset values. Because of the substantial shock on the true asset values, the banks' assets were more opaque during the recent financial crisis than outside that.
Number of Pages in PDF File: 54
find it at: papers.ssrn.com/sol3/papers.cfm?abstract_id=2787815