Did Fair-Value Accounting Contribute to the Financial Crisis?

Abstract:     
The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value accounting added to the severity of the 2008 financial crisis in a major way. While there may have been downward spirals or asset-fire sales in certain markets, we find little evidence that these effects are the result of fair-value accounting. We also find little support for claims that fair-value accounting leads to excessive writedowns of banks’ assets. If anything, empirical evidence to date points in the opposite direction, that is, towards overvaluation of bank assets.

Number of Pages in PDF File: 48

Keywords: Mark-to-market accounting, Financial institutions, Liquidity, Financial crisis, Banks, Financial regulation, Procyclicality, Contagion

JEL Classification: G14, G15, G30, K22, M41, M42

working papers series