Niranjan Chipalkatti, Massimo DiPierro, Carl Luft and John Plamondon
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…
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.
Details
Keywords
Niranjan Chipalkatti and Vinay Datar
Previous studies have established that the failure of the hedge fund, long‐term capital management (LTCM), was associated with significant negative abnormal returns for many US…
Abstract
Purpose
Previous studies have established that the failure of the hedge fund, long‐term capital management (LTCM), was associated with significant negative abnormal returns for many US banks, especially around September 2, 1998, when LTCM announced its failure. This study attempts to examine whether bank value‐at‐risk (VaR) disclosures were used by investors to assess the potential trading loss that a bank could suffer at that time.
Design/methodology/approach
This study examines whether there was any association between disclosed VaR and the magnitude of abnormal returns and trading volume surrounding the announcement date.
Findings
The results indicate that there was no such association which suggests that investors did not use the VaR information to assess the potential trading losses of exposed banks. Banks that formed part of the LTCM bailout consortium and those with larger amounts of notional derivatives faced the largest negative reaction at the time of the failure announcement.
Originality/value
VaR disclosures are costly to prepare and complex to interpret. The study finds no benefits of VaR disclosures to bank investors.