Did Fair-Value Accounting Contribute to the Financial Crisis?
Journal of Economic Perspectives
vol. 24,
no. 1, Winter 2010
(pp. 93-118)
(Complimentary)
Abstract
The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value accounting added to the severity of the 2008 financial crisis in a major way. While there may have been downward spirals or asset-fire sales in certain markets, we find little evidence that these effects are the result of fair-value accounting. We also find little support for claims that fair-value accounting leads to excessive write-downs of banks' assets. If anything, empirical evidence to date points in the opposite direction, that is, toward the overvaluation of bank assets during the crisis.Citation
Laux, Christian, and Christian Leuz. 2010. "Did Fair-Value Accounting Contribute to the Financial Crisis?" Journal of Economic Perspectives, 24 (1): 93-118. DOI: 10.1257/jep.24.1.93JEL Classification
- G01 Financial Crises
- G21 Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 Financial Institutions and Services: Government Policy and Regulation
- M41 Accounting
- M48 Accounting and Auditing: Government Policy and Regulation
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