Date of Award

Spring 2015



First Advisor

Dr. Mariah Webinger


In the aftermath of the financial crisis of 2008, fair value accounting in banks has come under a great deal of criticism by some who believed bank managers were intentionally reclassifying assets to prevent write-downs, or who believed that banks were taking risks with fair value assets and liabilities that caused their distressed states. We analyzed banks’ use of fair value accounting by using the SEC’s EDGAR database to read and analyze the financial statements of public banks which received Troubled Asset Relief Program (TARP) funds and have since repaid them. We looked to see if banks classified more assets as level 3, the most subjective measurement, to avoid write-downs and/or if they held more or fewer fair value assets or liabilities in their portfolios when distressed. In determining whether or not a bank is distressed, we view a bank as distressed in the quarter prior to receiving TARP funds, and as no longer distressed in the quarter in which the final repayment of TARP funds took place. In our research, we used data such as the ratio of fair value assets to total assets, fair value liabilities to total liabilities, and the composition of fair value assets and liabilities by level (levels 1, 2, and 3) from both when the banks were distressed and when they had become stable again. We find weak evidence for the “classification effect,” or the idea that bank managers intentionally reclassified fair value assets when under distress, and strong evidence for the “portfolio effect,” or the idea that banks’ risk appetites significantly changed during the crisis. This suggests that while the banks’ risk appetites changed when they were distressed, they were not intentionally classifying more assets as level 3.

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Creative Commons Attribution-Share Alike 3.0 License
This work is licensed under a Creative Commons Attribution-Share Alike 3.0 License.

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