The decision relevance of loan fair values for depositors

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 on the decline in loan liquidation values, triggering panic-based withdrawals motivated by (self-fulfilling) expectations of withdrawals by other depositors. The findings inform the cost-benefit trade-off of reporting loan fair values.

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

JEL Classification: M40, G21, G32, D82