Does fair value accounting exacerbate the procyclicality of bank lending?

• Autores: Biqin Xie
• Localización: Journal of Accounting Research, ISSN-e 1475-679X, Vol. 54, Nº. 1, 2016, págs. 235-274
• Idioma: inglés
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• Resumen

  • This study investigates whether fair value accounting contributes to the procyclicality of bank lending. Using banks’ approval/denial decisions on residential mortgage applications to capture banks’ supply of credit, I find no evidence that fair value accounting has procyclical effects on bank lending over the past two business cycles. I further identify two reasons for this result. First, the main accounting item distinguishing fair value accounting from historical cost accounting—unrealized gains and losses on available-for-sale securities—does not affect lending decisions. Second, unrealized gains and losses on available-for-sale securities are not procyclical, as the risk-free interest rate rises during some expansionary periods, resulting in unrealized losses, while the risk-free interest rate (and sometimes the default spread) falls during some recessionary periods, resulting in unrealized gains.