Fair value accounting: villain or innocent victim?: exploring the links between fair value accounting, bank regulatory capital, and the recent financial crisis

Sanders Shaffer

No QAU10-1, Supervisory Research and Analysis Working Papers from Federal Reserve Bank of Boston

Abstract: There is a popular belief that the confluence of bank capital rules and fair value accounting helped trigger the recent financial crisis. The claim is that questionable valuations of long term investments based on prices obtained from illiquid markets created a pro-cyclical effect whereby mark to market adjustments reduced regulatory capital forcing banks to sell off investments which further depressed prices. This ultimately led to bank instability and the credit effects that reached a peak late in 2008. This paper analyzes a sample of large banks to attempt to measure the strength of the link between fair value accounting, regulatory capital rules, pro-cyclicality and financial contagion. The focus is on large banks because they value a significant portion of their balance sheets using fair value. They also hold investment portfolios that contain illiquid assets in large enough volumes to possibly affect the market in a pro-cyclical fashion. The analysis is based on a review of recent historical financial data. The analysis does not reveal a clear link for most banks in the sample, but rather suggests that there may have been other more significant factors putting stress on bank regulatory capital.

Keywords: Global financial crisis; Bank capital; Banks and banking - Accounting (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-acc, nep-ban, nep-bec, nep-his and nep-reg
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.bostonfed.org/bankinfo/qau/wp/2010/qau1001.htm (text/html)
http://www.bostonfed.org/bankinfo/qau/wp/2010/qau1001.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedbqu:qau10-1

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Supervisory Research and Analysis Working Papers from Federal Reserve Bank of Boston Contact information at EDIRC.
Bibliographic data for series maintained by Catherine Spozio ().