In the 1980s and early 1990s, the “savings and loan” banks in the United States ran into great financial difficulty because of mismanagement, changes in regulations, and changes in interest rates. Over 1,000 were closed by the U.S. government. Because the U.S.

government insured the deposits in these banks, the cost to the U.S. government was very large—about $160 billion.

During the “Savings and Loan Crisis,” regulators had to decide whether to declare that particular banks were “insolvent.” If the bank was declared insolvent, the government would incur costs of closing it. If the bank was not declared insolvent, it would stay in business, and might earn enough money to get out of trouble. Of course, it might also lose more money, and the later cost of closing it would be higher.

Whether a bank was “insolvent” depended on the accounting rules used to measure the value of its assets.

The chapter discussed three different views of how accounting rules should be set: a critical–interpretive view; an economic consequences view; and a decision-usefulness view. Consider how each of these views might be used to decide on either valuing the bank’s assets optimistically, or conservatively