Effects of SFAS 133 on the Risk Relevance of Accounting Measures of Banks’ Derivative Exposures

Posted: 28 Oct 2010 Last revised: 19 Jul 2012

See all articles by Anwer S. Ahmed

Anwer S. Ahmed

Texas A&M University - Mays Business School

Emre Kilic

University of Houston - C. T. Bauer College of Business

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Date Written: February 1, 2012

Abstract

We provide evidence on the effects of SFAS 133 on the risk relevance of accounting measures of bank derivative exposures to bond markets. First, we find that interest rate derivatives classified as hedging are more negatively associated with fixed-rate bond spreads after SFAS 133. We also find that hedging derivatives offset non-trading positions to a greater extent after SFAS 133. Second, for the largest 25 banks, we find that interest and foreign exchange rate trading derivatives are more negatively associated with fixed-rate bond spreads after SFAS 133, consistent with more economic hedges being classified as trading after SFAS 133. For these banks, trading derivative exposures offset non-derivative trading exposures to a greater extent after SFAS 133. Our results suggest that, contrary to critics’ claims, SFAS 133 has increased the risk relevance of accounting measures of derivative exposures to bond investors and benefited banks in terms of reducing their cost of capital.

Keywords: Risk Relevance, Derivatives, SFAS 133, Bond Spread

JEL Classification: G12, G14, G21, G32, M41

Suggested Citation

Ahmed, Anwer S. and Kilic, Emre and Lobo, Gerald J., Effects of SFAS 133 on the Risk Relevance of Accounting Measures of Banks’ Derivative Exposures (February 1, 2012). Accounting Review, Vol. 86, No. 3, pp. 769-804, 2011. Available at SSRN: https://ssrn.com/abstract=1698779

Anwer S. Ahmed

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4353
United States

Emre Kilic (Contact Author)

University of Houston - C. T. Bauer College of Business ( email )

Department of Accountancy & Taxation
4800 Calhoun Road
Houston, TX 77204
United States
(713) 743-4795 (Phone)
(713) 743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/Directory/profile.asp?search=Emre%20Kilic

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

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