TY - JOUR

T1 - Fair-value accounting, asset sales and banks’ lending

T2 - The role of asset sales in reducing fair value’s pro-cyclical effects

AU - Downing, Jeff

N1 - Downing, J. Fair-value accounting, asset sales and banks’ lending: The role of asset sales in reducing fair value’s pro-cyclical effects / J. Downing // Studies in Economics and Finance. - 2018. - Volume 35, Issue 1. - P. 163-177. Publisher Copyright: © 2018, Emerald Publishing Limited.

PY - 2018

Y1 - 2018

N2 - Purpose: This paper aims to examine the interaction between fair-value accounting, asset sales and banks’ lending in booms and busts. Throughout, the author uses “fair value” and “mark-to-market” interchangeably, to denote an accounting regime where changes in the prices of banks’ assets affect regulatory capital. “Historic-cost accounting” has been used in the paper to denote an accounting regime where changes in asset prices do not affect regulatory capital. Design/methodology/approach: The author built a model that examines how the accounting regime affects banks’ incentives to sell assets and how the impact of the accounting regime on asset sales affects lending. Findings: In a bust, fair value strengthens banks’ incentives to sell assets. The resulting increase in sales increases banks’ lending capacity. Consequently, lending can be higher under fair value. Conversely, in a boom, historic cost strengthens banks incentives to sell assets. The resulting increase in sales increases banks’ lending capacity. Hence, lending can be higher under historic cost. Originality/value: This paper identifies a new channel through which the accounting regime could affect lending. The accounting regime can affect banks’ incentives to sell assets. The resulting difference in sales can affect banks’ ability to make new loans. Hence, in a boom, although banks book mark-to-market gains under fair value, asset sales could be higher under historic cost. Lending, thus, could be higher under historic cost. Conversely, in a bust, although banks book mark-to-market losses under fair value, sales could be higher under fair value. Lending, thus, could be higher under fair value.

AB - Purpose: This paper aims to examine the interaction between fair-value accounting, asset sales and banks’ lending in booms and busts. Throughout, the author uses “fair value” and “mark-to-market” interchangeably, to denote an accounting regime where changes in the prices of banks’ assets affect regulatory capital. “Historic-cost accounting” has been used in the paper to denote an accounting regime where changes in asset prices do not affect regulatory capital. Design/methodology/approach: The author built a model that examines how the accounting regime affects banks’ incentives to sell assets and how the impact of the accounting regime on asset sales affects lending. Findings: In a bust, fair value strengthens banks’ incentives to sell assets. The resulting increase in sales increases banks’ lending capacity. Consequently, lending can be higher under fair value. Conversely, in a boom, historic cost strengthens banks incentives to sell assets. The resulting increase in sales increases banks’ lending capacity. Hence, lending can be higher under historic cost. Originality/value: This paper identifies a new channel through which the accounting regime could affect lending. The accounting regime can affect banks’ incentives to sell assets. The resulting difference in sales can affect banks’ ability to make new loans. Hence, in a boom, although banks book mark-to-market gains under fair value, asset sales could be higher under historic cost. Lending, thus, could be higher under historic cost. Conversely, in a bust, although banks book mark-to-market losses under fair value, sales could be higher under fair value. Lending, thus, could be higher under fair value.

KW - Banking regulation

KW - Banks

KW - Fair-value accounting

UR - http://www.scopus.com/inward/record.url?scp=85044822848&partnerID=8YFLogxK

U2 - 10.1108/SEF-10-2017-0294

DO - 10.1108/SEF-10-2017-0294

M3 - Article

AN - SCOPUS:85044822848

VL - 35

SP - 163

EP - 177

JO - Studies in Economics and Finance

JF - Studies in Economics and Finance

SN - 1086-7376

IS - 1

ER -