Chapter 2: Do Accounting Standards Contribute to Bank Stability?

This chapter examines the bank stability indicators under two different accounting regimes: Local GAAP-compliant and mixed accounting standards. The objective is to determine whether adopting Local GAAP and IAS/IFRS contributes to bank stability in Asia, focusing on China, Japan, South Korea, Hong Kong, Taiwan, Indonesia, Malaysia, Thailand, Singapore, and the Philippines from 2005 Q1 to 2021 Q4. The findings indicate Local GAAP may have had a detrimental effect on banks’ stability, but the transition to IAS/IFRS improves bank stability. The results also suggest the procyclicality of bank stability for Local GAAP-compliant and mixed accounting banks, increased risk-taking, and bank capitalization during economic/financial upturns. Further, Local GAAP-compliant banks are more susceptible to changes in excessive credit growth, and mixed accounting banks are more vulnerable to changes in economic activities. In addition, the rise in risk appetite is greater than the rise of regulatory buffers for economic and financial upturns for Local GAAP-compliant banks.