The Effect of Fair vs. Book Value Accounting on the Behavior of Banks

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The Effect of Fair vs. Book Value Accounting on the Behavior of Banks

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Roland Strausz () (Free University of Berlin, Department of Economics)
Katrin Burkhardt

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Roland Strausz

Abstract

This paper studies the effect of book versus fair value accounting on a bank's (re)investment behavior, risk of default, investment value, and the need for regulation. Adopting the wide--spread view that fair value accounting reduces the degree of asymmetric information, it shows that fair value accounting increases liquidity. Consequently, it intensifies risk shifting and, therefore, increases the need for regulation and the risk of default. For highly leveraged institutions the increased risk shifting under fair value accounting outweighs an underinvestment of book value accounting and ultimately reduces welfare.

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Paper provided by Departmental Working Papers in its series Papers with number 024.

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Handle: RePEc:bef:lsbest:024

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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting

This paper has been announced in the following NEP Reports:

NEP-ACC-2004-07-11 (Accounting & Auditing)
NEP-ALL-2004-07-11 (All new papers)
NEP-FIN-2004-07-11 (Finance)

References listed on IDEAS
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Venkatachalam, Mohan, 1996. "Value-relevance of banks' derivatives disclosures," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 327-355, October. [Downloadable!] (restricted)
Andrea Enria & Lorenzo Cappiello & Frank Dierick & Sergio Grittini & Andrew Haralambous & Angela Maddaloni & Philippe Molitor & Fatima Pires & Paolo Poloni, 2004. "Fair value accounting and financial stability," Occasional Paper Series 13, European Central Bank. [Downloadable!]
Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August. [Downloadable!] (restricted)
Chan, Yuk-Shee & Greenbaum, Stuart I & Thakor, Anjan V, 1992. " Is Fairly Priced Deposit Insurance Possible?," Journal of Finance, American Finance Association, vol. 47(1), pages 227-45, March. [Downloadable!] (restricted)
Other versions:
- Yuk-Shee Chan & Stuart I. Greenbaum & Anjan V. Thakor, 2004. "Is Fairly Priced Deposit Insurance Possible?," Finance 0411018, EconWPA. [Downloadable!]

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This page was last updated on 2009-12-21.

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