The decision relevance of loan fair values for depositors

72 Pages Posted: 1 Apr 2022 Last revised: 26 Mar 2024

See all articles by Qi Chen

Qi Chen

Duke University - Fuqua School of Business

Rahul Vashishtha

Duke University

Shuyan Wang

University of Minnesota - Twin Cities, Carlson School of Management; Duke University - Fuqua School of Business

Date Written: March 19, 2024

Abstract

Using a large sample of US commercial banks from 1994-2019, we find that loan fair values are highly relevant for depositor decision-making: a one-standard-deviation decrease in loan fair value performance is associated with more than 10% lower uninsured deposit flows than the sample average. Information in fair values about loan credit quality is quite limited and cannot account for the bulk of the relevance; instead, consistent with models of bank fragility, the relevance seems to stem more from information in declining fair values about lowering of loan liquidation values, triggering panic-based withdrawals that are motivated by (self-fulfilling) expectations of withdrawals by other depositors. The findings inform the cost-benefit trade-off of reporting loan fair values.

Keywords: Fair Value; Banks; Loans; Deposits; Strategic Complementarity; Panic Run

JEL Classification: M40, G21, G32, D82

Suggested Citation

Chen, Qi and Vashishtha, Rahul and Wang, Shuyan, The decision relevance of loan fair values for depositors (March 19, 2024). Available at SSRN: https://ssrn.com/abstract=4036953 or http://dx.doi.org/10.2139/ssrn.4036953

Qi Chen

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
(919) 660-7753 (Phone)

Rahul Vashishtha (Contact Author)

Duke University ( email )

Durham, NC 27708-0204
United States
919-660-7755 (Phone)
91-660-7971 (Fax)

Shuyan Wang

University of Minnesota - Twin Cities, Carlson School of Management ( email )

Minneapolis, MN
United States

Duke University - Fuqua School of Business

100 Fuqua Drive
Durham, NC 27708
United States

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