The Real Effects of FAS 166/167 on Banks’ Mortgage Approval and Sale Decisions

53 Pages Posted: 5 Jul 2016 Last revised: 20 Jan 2018

See all articles by Yiwei Dou

Yiwei Dou

New York University (NYU) - Department of Accounting

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business

Biqin Xie

Pennsylvania State University

Multiple version iconThere are 2 versions of this paper

Date Written: January 5, 2018

Abstract

We examine the real effects of FAS 166 and FAS 167 on banks’ loan-level mortgage approval and sale decisions. Effective in 2010, these standards tightened the accounting for securitizations and consolidation of securitization entities, respectively, causing banks to recognize an estimated $811 billion of securitized assets on balance sheet. We find that banks that recognize more securitized assets exhibit larger decreases in mortgage approval rates and larger increases in mortgage sale rates. These effects significantly exceed those of banks’ off-balance sheet securitized assets, consistent with our results being driven by the consolidation of securitization entities rather than by securitization per se. We conduct tests that help rule out the financial crisis as an alternative explanation for our results. Further analyses suggest that mechanisms underlying the results include consolidating banks’ reduced regulatory capital adequacy, increased market discipline, and consequent desire not to recognize high-risk mortgages on balance sheet.

Keywords: variable interest entities; consolidation; banks; mortgage approval; mortgage sale

JEL Classification: G21, M41

Suggested Citation

Dou, Yiwei and Ryan, Stephen G. and Xie, Biqin, The Real Effects of FAS 166/167 on Banks’ Mortgage Approval and Sale Decisions (January 5, 2018). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2803714 or http://dx.doi.org/10.2139/ssrn.2803714

Yiwei Dou

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 10-180
New York, NY 10012
United States

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street, Suite 10-73
New York, NY 10012-1118
United States
212-998-0020 (Phone)

Biqin Xie (Contact Author)

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

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