Books vs. Fair Value Accounting in Banking, and Intertemporal Smoothing
AbstractThe aim of this paper is to examine the pros and cons of book and fair value accounting from the perspective of the theory of banking. We consider the implications of the two accounting methods in an overlapping generations environment. As observed by Allen and Gale (1997), in an overlapping generation model, banks have a role as intergenerational connectors as they allow for intertemporal smoothing. Our main result is that when dividends depend on profits, book value ex ante dominates fair value, as it provides better intertemporal smoothing. This is in contrast with the standard view that states that, fair value yields a better allocation as it reflects the real opportunity cost of assets. Banking regulation play an important role by providing the right incentives for banks to smooth intertemporal consumption whereas market discipline improves intratemporal efficiency.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2004-FE-13.
Date of creation: 01 Sep 2004
Date of revision:
Other versions of this item:
- Xavier Freixas & Dimitrios P. Tsomocos, 2004. "Book vs. fair value accounting in banking and intertemporal smoothing," Economics Working Papers 771, Department of Economics and Business, Universitat Pompeu Fabra.
- Xavier Freixas & Dimitrios P. Tsomocos, 2004. "Book vs. Fair Value Accounting in Banking, and Intertemporal Smoothing," OFRC Working Papers Series 2004fe13, Oxford Financial Research Centre.
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Philippe Aghion, Patrick Bolton & Steven Fries, 1999. "Optimal Design of Bank Bailouts: The Case of Transition Economies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(1), pages 51-, March.
- S. Bhattacharya & P. Fulghieri & R. Rovelli, 1997.
"Financial Intermediation Versus Stock Markets in a Dynamic Intertemporal Model,"
300, Dipartimento Scienze Economiche, Universita' di Bologna.
- Sudipto Bhattacharya & Paolo Fulghieri & Riccardo Rovelli, 1998. "Financial Intermediation Versus Stock Markets in a Dynamic Intertemporal Model," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 154(1), pages 291-, March.
- Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
- Franklin Allen & Douglas Gale, 1995.
"Financial Markets, Intermediaries, and Intertemporal Smoothing,"
Center for Financial Institutions Working Papers
95-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Allen, Franklin & Gale, Douglas, 1997. "Financial Markets, Intermediaries, and Intertemporal Smoothing," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 523-46, June.
- Franklin Allen & Douglas Gale, 1996. "Financial Markets, Intermediaries and Intertemporal Smoothing," Center for Financial Institutions Working Papers 96-33, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Franklin Allen & Douglas Gale, 1995. "Financial markets, intermediaries, and intertemporal smoothing," Working Papers 95-4, Federal Reserve Bank of Philadelphia.
- Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
- Douglas W. Diamond & Philip H. Dybvig, 2000.
"Bank runs, deposit insurance, and liquidity,"
Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
- Qi, Jianping, 1994. "Bank Liquidity and Stability in an Overlapping Generations Model," Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 389-417.
- Allen, Franklin & Carletti, Elena, 2008.
"Mark-to-market accounting and liquidity pricing,"
Journal of Accounting and Economics,
Elsevier, vol. 45(2-3), pages 358-378, August.
- Huizinga, Harry & Laeven, Luc, 2009.
"Accounting discretion of banks during a financial crisis,"
CEPR Discussion Papers
7381, C.E.P.R. Discussion Papers.
- Huizinga, H.P. & Laeven, L., 2009. "Accounting Discretion of Banks During a Financial Crisis," Discussion Paper 2009-58, Tilburg University, Center for Economic Research.
- Luc Laeven & Harry Huizinga, 2009. "Accounting Discretion of Banks During a Financial Crisis," IMF Working Papers 09/207, International Monetary Fund.
- Vincent Bouvatier & Laetitia Lepetit, 2008.
"Banks' Procyclical Behavior: Does Provisioning Matter?,"
- Bouvatier, Vincent & Lepetit, Laetitia, 2008. "Banks' procyclical behavior: Does provisioning matter?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(5), pages 513-526, December.
- Bannier, Christina E., 2007. "Smoothing versus timeliness - wann sind stabile Ratings optimal und welche Anforderungen sind an optimale Berichtsregeln zu stellen?," Frankfurt School - Working Paper Series 84, Frankfurt School of Finance and Management.
- Vincent Bouvatier & Laetitia Lepetit, 2006.
"Banks'procyclicality behavior : does provisioning matter ?,"
Cahiers de la Maison des Sciences Economiques
bla06035, Université Panthéon-Sorbonne (Paris 1).
- Vincent Bouvatier & Laetitia Lepetit, 2006. "Banks' procyclicality behavior : does provisioning matter ?," UniversitÃ© Paris1 PanthÃ©on-Sorbonne (Post-Print and Working Papers) halshs-00115622, HAL.
- Vincent Bouvatier & Laetitia Lepetit, 2006. "Banks' procyclicality behavior : does provisioning matter ?," Post-Print halshs-00115622, HAL.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Caroline Wise).
If references are entirely missing, you can add them using this form.