Bank Runs and the Accounting for Illiquid Assets in Financial Institutions

Document Type

Article

Publication Title

Accounting Education

Publication Date

1-1-2014

Abstract

Financial services are an increasingly important sector in modern economies, yet many accounting and auditing texts focus on manufacturing and retailing. This teaching note describes the role of financial institutions in transforming long-term, difficult-to-sell assets into short-term bank accounts. This is referred to as liquidity transformation. The social benefits and risks of liquidity transformation are described. The social benefit occurs due to the increased liquidity provided by the bank to depositors. The risk comes in the form of a bank run, wherein difficult-to-sell assets cannot be redeemed in time to cover the rapid and unexpected withdrawals of depositors. The financial statements of a financial institution are presented and the issue of valuation is discussed. Finally, practical relevance for accounting students is enhanced by including discussions of historical precedents and of implications for financial reporting and auditing. © 2014 © 2014 Taylor & Francis.

Volume

23

Issue

3

First Page

277

Last Page

294

DOI

10.1080/09639284.2013.872349

ISSN

09639284

E-ISSN

14684489

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