This paper shows that banks overstate the value of distressed assets and their regulatory capital during the U.S. mortgage crisis. Banks' balance sheets overvalue real estate-related assets compared to the market value of these assets. Banks with large exposure to mortgage-backed securities also...

Employing data on over 100 GCC banks for 1996e2011, we test the relation between risk and capital. Given the interlinkage between these two variables, the model employs a 3SLS estimation that takes on board this simultaneity. Consistent with the literature, risk is measured by the Z-score, while...