Accounting Discretion, Market Discipline and Bank Behaviour: Some Insights from Fair Value Accounting

37 Pages Posted: 17 Feb 2017

Multiple version iconThere are 2 versions of this paper

Date Written: February 2017

Abstract

Using quarterly data on FAS 157 fair value disclosures for US bank holding companies from 2008 to 2013, we test whether capital ratios and the effects of market discipline differ according to extent and nature of assets recognized under Level 3 standards. These standards offer management significant discretion for measuring fair values, potentially reducing bank transparency and affecting market perceptions about bank risk. We find limited evidence that capital ratios are lower at institutions engaging in Level 3 trading activities for given risk levels, consistent with opportunistic behaviour. We also find that market discipline, as measured by whether an institution has a US stock exchange listing or dependence on short-term, uninsured funding sources, is effective in moderating this behaviour. At these institutions capital ratios are higher, consistent with there being a direct (ex ante) disciplining effect on bank behaviour.

Keywords: Banking, market discipline, accounting discretion, regulatory capital ratios

JEL Classification: G21, G28, G32

Suggested Citation

Bouther, Regis and Francis, William, Accounting Discretion, Market Discipline and Bank Behaviour: Some Insights from Fair Value Accounting (February 2017). Bank of England Working Paper No. 647, Available at SSRN: https://ssrn.com/abstract=2919409 or http://dx.doi.org/10.2139/ssrn.2919409

Regis Bouther

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

William Francis (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
37
Abstract Views
401
PlumX Metrics