Machine learning in accounting: Insight from the March 2023 bank failures

Abstract

This research investigates the bank failures in the United States in March 2023, concentrating on the impact of held-to-maturity debt instruments in the event and the implications for accounting methods. Our research deciphers the alleged “accounting loophole” (Farrell, 2023) associated with these securities and provides an in-depth analysis of the associated accounting treatment. We analyze the accounting treatment using the Accounting Standards Codification (ASC) and International Financial Reporting Standards (IFRS). Furthermore, our study employs automated machine learning techniques and the local interpretable model-agnostic explanations (LIME) method to identify key accounting features that could explain bank failures. The research identifies five essential accounting aspects, two of which are related to held-to-maturity assets. The findings underscore the importance of these accounting features in evaluating financial institutions, thereby providing valuable insights for stakeholders, decision-makers, and future research. Our research also advocates for increased transparency and accuracy in accounting practices, via ASC 825 (Financial Accounting Standards Board [FASB], n.d.-a), particularly related to the fair value of held-to-maturity securities.

Can Discount Window Stigma Be Cured? An Experimental Investigation

“…For details see e.g. Carlson and Rose (2017), Ennis and Price (2020), or McLaughlin (2023). 21 Although it may not cure stigma, required borrowing may have value.…”

“…In the aftermath of the 2023 banking turmoil, some observers suggested that the pricing of the 11 DW should become more competitive so as to mitigate stigma (McLaughlin 2023(McLaughlin , G30 2024. 16 While such a policy has often been discussed in the past, A&H found that lowering the cost of the DW was not effective in their experiment.…”

“…Policy makers believe that the DW should be uniquely positioned to provide ready access to liquidity (Barr 2023, Hsu 2024. 7 To achieve this objective, several reforms have been proposed, from streamlining DW operations (Logan 2023, Scott 2024 to requiring that banks have enough collateral pre-positioned at the DW to cover any meaningful run on their assets (McLaughlin 2023, G30 2024, Hsu 2024. Further, recognizing that stigma must be mitigated, regulators have considered imposing a mandate for banks to access the DW regularly (Logan 2023, Barr 2023, Hsu 2024, Mester 2024.…”

“… See Armantier et al (2015),McLaughlin (2023McLaughlin ( , 2024,Metrick (2024), orArmantier and Cipriani (2024).4 "In August 2007,… banks were reluctant to rely on discount window credit to address their funding needs. The banks' concern was that their recourse to the discount window, if it became known, might lead market participants to infer weakness -the so-called stigma problem."…”