A Convenient Scapegoat: Fair Value Accounting by Commercial Banks during the Financial Crisis

The Accounting Review, Vol. 87, No. 1, January 2012

Posted: 15 Mar 2010 Last revised: 2 Feb 2012

Brad A. Badertscher

University of Notre Dame

Jeffrey J. Burks

University of Notre Dame

Peter D. Easton

University of Notre Dame - Department of Accountancy

Date Written: March 1, 2010

Abstract

Critics argue that the “fair value” provisions in U.S. accounting rules exacerbated the recent financial crisis by depleting banks’ regulatory capital, which curtailed lending and triggered asset sales, leading to further economic turmoil. Defenders counter-argue that the role of fair value in U.S. accounting rules is insufficient to lead to the pro-cyclical effects alleged by the critics; they point out that most bank assets are not fair valued, and the assets that are fair valued likely have little effect on regulatory capital, especially when banks do not intend to sell the assets at low prices. Our empirical evidence indicates that fair value provisions in U.S. accounting rules did not affect the commercial banking industry in the ways commonly alleged by critics. We show that fair value accounting losses had minimal effect on regulatory capital, and there is no evidence of increased selling of securities during the crisis.

Keywords: regulatory capital, standard setting, other-than-temporary-impairments, fair value accounting, mark-to-market, pro-cyclical, contagion, credit crisis, asset sales

JEL Classification: M41, M42, M44

Suggested Citation

Badertscher, Brad A. and Burks, Jeffrey J. and Easton, Peter D., A Convenient Scapegoat: Fair Value Accounting by Commercial Banks during the Financial Crisis (March 1, 2010). The Accounting Review, Vol. 87, No. 1, January 2012. Available at SSRN: https://ssrn.com/abstract=1569673

Brad A. Badertscher

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Jeffrey J. Burks (Contact Author)

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Peter D. Easton

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6096 (Phone)
574-631-5127 (Fax)

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