Does Fair Value Accounting Exacerbate the Procyclicality of Bank Lending?

Biqin Xie

Research output: Contribution to journalArticlepeer-review

32 Scopus citations


This study investigates whether fair value accounting contributes to the procyclicality of bank lending. Using banks' approval/denial decisions on residential mortgage applications to capture banks' supply of credit, I find no evidence that fair value accounting has procyclical effects on bank lending over the past two business cycles. I further identify two reasons for this result. First, the main accounting item distinguishing fair value accounting from historical cost accounting-unrealized gains and losses on available-for-sale securities-does not affect lending decisions. Second, unrealized gains and losses on available-for-sale securities are not procyclical, as the risk-free interest rate rises during some expansionary periods, resulting in unrealized losses, while the risk-free interest rate (and sometimes the default spread) falls during some recessionary periods, resulting in unrealized gains.

Original languageEnglish (US)
Pages (from-to)235-274
Number of pages40
JournalJournal of Accounting Research
Issue number1
StatePublished - Mar 1 2016

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics


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