The Effect of Fair vs. Book Value Accounting on the Behavior of Banks

Roland Strausz and Katrin Burkhardt

Abstract: This paper studies the effect of book versus fair value accounting on a bank's (re)investment behavior, risk of default, investment value, and the need for regulation. Adopting the wide--spread view that fair value accounting reduces the degree of asymmetric information, it shows that fair value accounting increases liquidity. Consequently, it intensifies risk shifting and, therefore, increases the need for regulation and the risk of default. For highly leveraged institutions the increased risk shifting under fair value accounting outweighs an underinvestment of book value accounting and ultimately reduces welfare.

Keywords: fair value accounting; book value accounting; asymmetric information; banking regulation; liquidity (search for similar items in EconPapers)
JEL-codes: G21 G28 M41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc and nep-fin
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