Bank Risk and the Value Relevance of Fair Value Gains and Losses

This paper studies the value relevance of fair value gains and losses for an international sample of banks. We investigate if the value relevance of fair value gains and losses increases or decreases with bank risk. One possibility is that, as risk increases, the scope for subjectivity in fair value...

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Main Authors: LIM, Chu Yeong, Walker, Martin, LEE, Edward, Kausar, Asad
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Language:English
Published: Institutional Knowledge at Singapore Management University 2011
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Online Access:https://ink.library.smu.edu.sg/soa_research/908
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spelling sg-smu-ink.soa_research-19072012-11-14T04:06:04Z Bank Risk and the Value Relevance of Fair Value Gains and Losses LIM, Chu Yeong Walker, Martin LEE, Edward Kausar, Asad This paper studies the value relevance of fair value gains and losses for an international sample of banks. We investigate if the value relevance of fair value gains and losses increases or decreases with bank risk. One possibility is that, as risk increases, the scope for subjectivity in fair value estimates increases thereby potentially rendering the numbers less useful. However another possibility is that the relevance of faithfully reported fair values increases as risk increases. We ask which of the two opposing forces is greatest. Using hand collected data we construct a model of bank returns based on the most important components of a bank’s net income. We disaggregate net income into profits before taxes, loan loss provisions, fair value gains and losses, and other operating income. We also distinguish between the operating profits and loss provisions of retail and corporate banking lines of business. The main finding is that the value relevance of fair value gains and losses is positively related to the level of bank risk prior to the crisis. During the crisis there is also evidence of a similar positive relationship, but it is not possible to draw firm conclusions for reasons we discuss. As a complement to the main result we find that the fair value gains/losses of banks that elect to use the fair value option for assets that could have been accounted for in terms of amortized costs are more value relevant and persistent. From a policy viewpoint our results suggest that, since fair value gains and losses of banks are especially informative for risky banks, such gains and losses should be separately accounted for according to line of business. 2011-12-01T08:00:00Z text https://ink.library.smu.edu.sg/soa_research/908 Research Collection School Of Accountancy eng Institutional Knowledge at Singapore Management University Accounting Finance and Financial Management
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Accounting
Finance and Financial Management
spellingShingle Accounting
Finance and Financial Management
LIM, Chu Yeong
Walker, Martin
LEE, Edward
Kausar, Asad
Bank Risk and the Value Relevance of Fair Value Gains and Losses
description This paper studies the value relevance of fair value gains and losses for an international sample of banks. We investigate if the value relevance of fair value gains and losses increases or decreases with bank risk. One possibility is that, as risk increases, the scope for subjectivity in fair value estimates increases thereby potentially rendering the numbers less useful. However another possibility is that the relevance of faithfully reported fair values increases as risk increases. We ask which of the two opposing forces is greatest. Using hand collected data we construct a model of bank returns based on the most important components of a bank’s net income. We disaggregate net income into profits before taxes, loan loss provisions, fair value gains and losses, and other operating income. We also distinguish between the operating profits and loss provisions of retail and corporate banking lines of business. The main finding is that the value relevance of fair value gains and losses is positively related to the level of bank risk prior to the crisis. During the crisis there is also evidence of a similar positive relationship, but it is not possible to draw firm conclusions for reasons we discuss. As a complement to the main result we find that the fair value gains/losses of banks that elect to use the fair value option for assets that could have been accounted for in terms of amortized costs are more value relevant and persistent. From a policy viewpoint our results suggest that, since fair value gains and losses of banks are especially informative for risky banks, such gains and losses should be separately accounted for according to line of business.
format text
author LIM, Chu Yeong
Walker, Martin
LEE, Edward
Kausar, Asad
author_facet LIM, Chu Yeong
Walker, Martin
LEE, Edward
Kausar, Asad
author_sort LIM, Chu Yeong
title Bank Risk and the Value Relevance of Fair Value Gains and Losses
title_short Bank Risk and the Value Relevance of Fair Value Gains and Losses
title_full Bank Risk and the Value Relevance of Fair Value Gains and Losses
title_fullStr Bank Risk and the Value Relevance of Fair Value Gains and Losses
title_full_unstemmed Bank Risk and the Value Relevance of Fair Value Gains and Losses
title_sort bank risk and the value relevance of fair value gains and losses
publisher Institutional Knowledge at Singapore Management University
publishDate 2011
url https://ink.library.smu.edu.sg/soa_research/908
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