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Bank Failure, Mark-to-Market and the Financial Crisis

47 Pages Posted: 27 Oct 2009 Last revised: 28 Nov 2011

Amir Amel-Zadeh

University of Oxford - Said Business School

Geoff Meeks

University of Cambridge - Judge Business School

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2011

Abstract

This paper is concerned with the allegation that fair value accounting rules have contributed significantly to the recent financial crisis. It focuses on one particular channel for that contribution: the impact of fair value on actual or potential failure of banks. The paper compares four criteria for failure: one economic, two legal and one regulatory. It is clear from this comparison that balance sheet valuations of assets are in two cases crucial in these definitions, and so the choice between “fair value” or other valuations can be decisive in whether a bank fails; but in two cases fair value is irrelevant. Bank failures might arise despite capital adequacy and balance sheet solvency due to sudden shocks to liquidity positions. Two of the most prominent bank failures cannot, at first sight, be attributed to fair value accounting: we show that Northern Rock was balance sheet solvent, even on a fair value basis, as was Lehman Brothers. The anecdotal evidence is augmented by empirical tests that suggest that mark-to-market accounting does not increase the perceived bankruptcy risk of banks.

Keywords: financial crisis, credit crunch, fair value accounting, mark-to-market, Basel 2, capital requirements, bank failure

JEL Classification: G01, G18, G33, M41, D82, E58, E65, G14, G28, G32, G38, K22, M48

Suggested Citation

Amel-Zadeh, Amir and Meeks, Geoff, Bank Failure, Mark-to-Market and the Financial Crisis (November 1, 2011). Available at SSRN: https://ssrn.com/abstract=1494452 or http://dx.doi.org/10.2139/ssrn.1494452

Amir Amel-Zadeh (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Geoff Meeks

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
+44 (0) 1223 764226 (Phone)
+44 (0) 1223 339701 (Fax)

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