Loan fair values and the financial crisis

Niranjan Chipalkatti, Massimo DiPierro, Carl Luft and John Plamondon

Journal of Risk Finance, 2020, vol. 21, issue 5, 559-576

Abstract: Purpose - In 2009, effective the second-quarter, the financial accounting standards board mandated that all banks need to disclose the fair value of loans in their 10-Q filings in addition to their 10-K filings. This paper aims to investigate whether these disclosures reduced the level of information asymmetry about the riskiness of bank loan portfolios during the financial crisis. Design/methodology/approach - The paper examines the impact of these disclosures on the bid-ask spread of a panel of 246 publicly traded bank holding companies. The spread serves as a proxy for information asymmetry and the ratio of the fair value of a bank’s loan portfolio to its book value is a proxy for the credit and liquidity risk associated with the same. The reaction to the first-quarter filing serves as a control to assess the reaction at the time of the second-quarter filing. Findings - There is a significant negative association between bid-ask spread and the ratio indicating that the fair value information was useful in reducing information asymmetry during the financial crisis. A pattern was observed in the information dissemination related to the fair value of loans that is consistent with the literature that documents a delayed investor reaction to complex financial information. Originality/value - Investors may use the fair value information to better assess the risk profile of a BHC’s loan portfolio. Also, loan fair values provide managers with data to better implement stress test models and determine optimal capital buffers.

Keywords: Financial crisis; Banking; Information asymmetry; Fair value; Credit risk; Bid-ask spreads (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:jrf-04-2020-0081

DOI: 10.1108/JRF-04-2020-0081

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