The Contribution of Bank Regulation and Fair Value Accounting to Procyclical Leverage

56 Pages Posted: 29 Jul 2013 Last revised: 8 Mar 2017

See all articles by Amir Amel-Zadeh

Amir Amel-Zadeh

University of Oxford - Said Business School

Mary E. Barth

Stanford University - Graduate School of Business

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Date Written: February 28, 2017

Abstract

Our analytical description of how banks’ responses to asset price changes can result in procyclical leverage reveals that for banks with a binding regulatory leverage constraint, absent differences in regulatory risk weights across assets, procyclical leverage does not occur. For banks without a binding constraint, fair value and bank regulation both can contribute to procyclical leverage. Empirical findings based on a large sample of US commercial banks reveal that bank regulation explains procyclical leverage for banks relatively close to the regulatory leverage constraint and contributes to procyclical leverage for those that are not. We also show that fair value accounting does not contribute to procyclical leverage by finding (i) the portion of comprehensive income attributable to fair value accounting, i.e., fair value comprehensive income, has a negative relation with change in leverage as expected for any increase in equity, (ii) no evidence of a positive relation between fair value comprehensive income and banks’ net purchases of assets, and (iii) the relation between change in leverage and fair value comprehensive income is more negative than that between change in leverage and change in equity.

Keywords: Fair value accounting, procyclicality, leverage, risk-based capital regulation, financial institutions, commercial banks

JEL Classification: E32, G20, G21, G28, G32, M41

Suggested Citation

Amel-Zadeh, Amir and Barth, Mary E. and Landsman, Wayne R., The Contribution of Bank Regulation and Fair Value Accounting to Procyclical Leverage (February 28, 2017). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2300497 or http://dx.doi.org/10.2139/ssrn.2300497

Amir Amel-Zadeh

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Mary E. Barth (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-9040 (Phone)
650-725-0468 (Fax)

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

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