Guoxiang Song: The role of fair-value accounting in the global financial crisis: Evidence from U.S. global systemically important banks 84-103

Fair-value accounting has been argued as one contributing factor to the global financial crisis that occurred from 2007 to 2008. However, recent empirical studies find no significant evidence for this argument. One reason for this inconsistency comes from the weaknesses of the research methods applied by these studies. As large samples are investigated, it is natural that the evidence reflects the role of fair-value accounting in small banks, and underweights the significance of systemically important banks. This paper examines the effects of accounting rules on the capital adequacy of six U.S. global systemically important banks (GSIBs) during the early period of the financial crisis. By investigating whether these effects have led a bank to move across the capital categories of U.S. prompt corrective action (PCA) provisions, the paper documents that fair-value accounting made an important contribution to the deterioration of the capital adequacy of two banks in terms of the leverage ratio and Tier 1 capital ratio, and to the deterioration of capital adequacy of all six banks in terms of the TCE ratio. Overall, it played a greater role than historical cost accounting in the early stage of this crisis and also contributed significantly to the financial crisis in the later stage.