Did fair-value accounting contribute to the financial crisis?

Christian Laux and Christian Leuz

No 2009/22, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value accounting added to the severity of the current financial crisis in a major way. While there may have been downward spirals or asset-fire sales in certain markets, we find little evidence that these effects are the result of fair-value accounting. We also find little support for claims that fair-value accounting leads to excessive write-downs of banks' assets. If anything, empirical evidence to date points in the opposite direction, that is, towards overvaluation of bank assets.

Keywords: Mark-to-Market Accounting; Financial Institutions; Liquidity; Financial Crisis; Banks; Financial Regulation; Procyclicality; Contagion (search for similar items in EconPapers)
JEL-codes: G14 G15 G30 K22 M41 M42 (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

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Related works:
Journal Article: Did Fair-Value Accounting Contribute to the Financial Crisis? (2010)
Working Paper: Did Fair-Value Accounting Contribute to the Financial Crisis? (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:200922

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