Did Fair-Value Accounting Contribute to the Financial Crisis?
Vienna University of Economics and Business
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network
February 20, 2010
Journal of Economic Perspectives, Vol. 24, pp. 93-118, Winter 2010
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 write-downs of banks’ assets. If anything, empirical evidence to date points in the opposite direction, that is, towards overvaluation of bank assets.
Keywords: Mark-to-market accounting, Financial institutions, Liquidity, Financial crisis, Banks, Financial regulation, Procyclicality, Contagion
JEL Classification: G14, G15, G30, K22, M41, M42
Date posted: March 22, 2010