Fair Value Accounting for Commercial Banks: An Empirical Analysis of SFAS No. 107

Abstract

This study evaluates the association between the market value of banks' common equity and fair value estimates disclosed under Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments. The results suggest that only the reported fair values of investment securities have incremental explanatory power relative to book value. No reliable evidence of incremental explanatory power is found for the fair value disclosures of loans, deposits, long-term debt or net off-balance sheet financial instruments. After controlling for two competing indicators of value captured by the accrual accounting system, ROE and growth in book value, the fair value of securities no longer exhibits a significant association with market value. Results from estimating a returns specification, which may implicitly control for correlated omitted variables, also exhibit no reliable evidence of significant incremental explanatory power in the fair value estimates.