Banks' Voluntary Adoption of Fair Value Accounting and Interbank Competition

• In Event: Disclosure Regulation

Abstract

We study the role of interbank competition in shaping banks' incentive to use fair-value accounting on a voluntary basis and the implications of allowing fair-value accounting discretion for the prevailing competitive equilibria. We find that allowing banks discretion to use fair-value accounting may give rise to multiple competitive equilibria in situations where the equilibrium would be unique in the absence of the fair value option. Two equilibria exist: a "mild" equilibrium and an "aggressive" equilibrium. Furthermore, we show that the intensity of interbank competition decides which equilibrium prevails. When the interbank competition is heavily restrained, only the mild equilibrium exists; however, as the competition becomes sufficiently intensive, the aggressive equilibrium stands as the unique equilibrium. When the competitiveness of the banking industry is of an intermediate value, the two equilibria coexist.

Authors

• Carlos Corona, Carnegie Mellon University

• Lin Nan, Purdue University

• Gaoqing Zhang, Carnegie Mellon University