Have SFAS 166 and SFAS 167 Improved the Financial Reporting for Securitizations?

Journal of Business Finance & Accounting, Forthcoming

Posted: 24 Mar 2020

See all articles by Min Kwan Ahn

Min Kwan Ahn

University of Hong Kong

Samuel B. Bonsall

Pennsylvania State University - Department of Accounting

Zahn Bozanic

Florida State University

Yiwei Dou

New York University (NYU) - Department of Accounting

Gordon Richardson

University of Toronto

Dushyantkumar Vyas

University of Toronto - Rotman School of Management; University of Toronto at Mississauga

Date Written: February 1, 2020

Abstract

Critics have alleged that securitization accounting prior to 2010 was among the causes of the recent financial crisis. In response to this criticism, the Financial Accounting Standards Board (FASB) implemented two new accounting standards, SFAS 166 and SFAS 167, to improve the financial reporting for securitizations. Bank regulators have stated their belief that SFAS 166/167 will result in a consolidated balance sheet (and risk-based capital ratios based thereupon) that better reflects a bank’s exposure to risk related to securitized assets. We document that, by ceding retained power or influence through the servicing / special servicing functions to third parties, SFAS 166/167 resulted in real effects to the extent that banks (particularly those that were weakly capitalized) achieved their accounting objectives in the post-SFAS 166/167 period through legitimate transaction structuring in line with the intent of the new rules. Further, we use capital market participants’ assessments of risk retention by sponsoring banks as a benchmark, and provide evidence consistent with bank regulators’ beliefs. In particular, following SFAS 166/167, equity investors of sponsoring banks do not consider (consider) as risk relevant securitized assets that receive off-balance sheet (on-balance sheet) treatment. Securitized assets that are consolidated under SFAS 166/167 exhibit the same risk relevance as assets that are not securitized, despite contractual provisions that would seem to imply substantial risk transfer.

Keywords: securitization, securitization accounting, FASB, SFAS 166 and 167, financial reporting, off-balance sheet, risk relevance, real effects

JEL Classification: M41

Suggested Citation

Ahn, Min Kwan and Bonsall, Samuel B. and Bozanic, Zahn and Dou, Yiwei and Richardson, Gordon and Vyas, Dushyantkumar, Have SFAS 166 and SFAS 167 Improved the Financial Reporting for Securitizations? (February 1, 2020). Journal of Business Finance & Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3545352

Min Kwan Ahn

University of Hong Kong ( email )

Pokfulam Road
Hong Kong
China

Samuel B. Bonsall

Pennsylvania State University - Department of Accounting ( email )

University Park, PA 16802-3306
United States

Zahn Bozanic (Contact Author)

Florida State University ( email )

Tallahasse, FL 32306
United States

Yiwei Dou

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

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

Gordon Richardson

University of Toronto ( email )

Toronto, Ontario M5S 3G8
Canada

Dushyantkumar Vyas

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

University of Toronto at Mississauga ( email )

3359 Mississauga Rd N.
3205 William Davis Building
Mississauga, Ontario L5L 1C6
Canada

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