Working Paper: NBER ID: w15515
Authors: Christian Laux; Christian Leuz
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: fair-value accounting; financial crisis; mark-to-market accounting; banking regulation
JEL Codes: F3; G15; G21; G24; G38; K22; M41; M48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fair-value accounting (G32) | financial stability (G28) |
| fair-value accounting (G32) | excessive leverage (G32) |
| excessive leverage (G32) | downward spirals (E32) |
| downward spirals (E32) | financial crisis (G01) |
| declining housing prices (R31) | financial crisis (G01) |
| increasing delinquency rates (G33) | financial crisis (G01) |
| fair-value changes (G19) | bank income (G21) |
| fair-value changes (G19) | regulatory capital (G28) |