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Loan fair values and the financial crisis

Author

Listed:
  • Niranjan Chipalkatti
  • Massimo DiPierro
  • Carl Luft
  • John Plamondon

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.

Suggested Citation

  • Niranjan Chipalkatti & Massimo DiPierro & Carl Luft & John Plamondon, 2020. "Loan fair values and the financial crisis," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 21(5), pages 559-576, August.
    • Handle: RePEc:eme:jrfpps:jrf-04-2020-0081
    DOI: 10.1108/JRF-04-2020-0081
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    Citations

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    Cited by:

    1. Lang, Qiaoqi & Ma, Feng & Mirza, Nawazish & Umar, Muhammad, 2023. "The interaction of climate risk and bank liquidity: An emerging market perspective for transitions to low carbon energy," Technological Forecasting and Social Change, Elsevier, vol. 191(C).
    2. Zhu, Bo & Liang, Chao & Mirza, Nawazish & Umar, Muhammad, 2023. "What drives gearing in early-stage firms? Evidence from blue economy startups," Journal of Business Research, Elsevier, vol. 161(C).

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