Fair Value Disclosures by Bank Holding Companies
Posted: 12 Jun 1995
Abstract
This paper analyzes the fair value data disclosed by bank holding companies under SFAS 107 and addresses some of the issues raised in the debate on the relevance of fair value accounting. The paper finds that most banks reported fair value estimates that exceeded their book values as of December 31 1992. Although the book value of securities and loans combined is similar in magnitude to deposits the effect of these two assets on the fair value of equity is five times greater than that of deposits. In addition to any real economic reasons that may apply the larger effect on the asset side of the balance sheet could be due to ignoring the core deposit intangible in valuing deposit obligations. In addition the paper provides evidence on the value-relevance of fair disclosures over and above the information already disclosed in banks' financial statements. The historical cost financial signals that represent profitability loan quality growth capital size etc. explain about 48% of the cross-sectional variation in the market-to-book ratio whereas the fair value disclosures add another 13% to the regression R- squared. With respect to off-balance sheet hedging behavior the excess of fair value of book value of on- balance sheet items is found to be significantly negatively associated with the unrealized gains/losses on off-balance sheet instruments only when the fair value of net loans are excluded. This suggests that it is difficult to make inferences about effect hedging based on fair value disclosures.
JEL Classification: G21, M41
Suggested Citation: Suggested Citation