Search Results
Working Paper
CECL and the Credit Cycle
We find that that the Current Expected Credit Loss (CECL) standard would slightly dampen fluctuations in bank lending over the economic cycle. In particular, if the CECL standard had always been in place, we estimate that lending would have grown more slowly leading up to the financial crisis and more rapidly afterwards. We arrive at this conclusion by estimating historical allowances under CECL and modeling how the impact on accounting variables would have affected banks' lending and capital distributions. We consider a variety of approaches to address uncertainty regarding the management of ...
Working Paper
How Does the Fed Adjust its Securities Holdings and Who is Affected?
The Federal Open Market Committee indicated in its September 2017 post-meeting statement that it will initiate in October a balance sheet normalization program to gradually reduce its securities holdings. This action will put in place a policy of reinvesting and redeeming portions of the principal payments received by the Federal Reserve from its holdings of Treasury and agency securities. How are these adjustments to the Federal Reserve?s securities holdings transacted and who is affected? This paper provides a primer regarding how the Federal Reserve accounts for these securities ...
Journal Article
Fair Value Accounting
Advocates of fair value accounting believe that fair value is a more relevant, more useful measure for financial reporting than historical cost. However, fair value accounting poses many challenges. In remarks before the International Association of Credit Portfolio Managers, Governor Susan Schmidt Bies shared the Federal Reserve's views on the proposed standards for valuing assets and liabilities currently measured or disclosed at fair value that were recently issued by the Financial Accounting Standards Board. Governor Bies's remarks highlighted fair value measurement issues, considerations ...
Working Paper
Accounting for Central Neighborhood Change, 1980-2010
Neighborhoods within 2 km of most central business districts of U.S. metropolitan areas experienced population declines from 1980 to 2000 but have rebounded markedly since 2000 at greater pace than would be expected from simple mean reversion. Statistical decompositions reveal that 1980-2000 departures of residents without a college degree (of all races) generated most of the declines while the return of college educated whites and the stabilization of neighborhood choices by less educated whites promoted most of the post-2000 rebound. The rise of childless households and the increase in the ...
Working Paper
Current Expected Credit Losses (CECL) Standard and Banks' Information Production
We examine whether the adoption of the current expected credit losses (CECL) model, which reflects forward-looking information in loan loss provisions (LLP), improves banks’ information production. Consistent with better information production, we find changes in CECL banks' financial reporting and operations. First, these banks' loan loss provisions become timelier and better reflect future local economic conditions. Second, CECL banks disclose longer, more forward-looking, and more quantitative LLP information. Lastly, they have fewer loan defaults after adopting CECL. These improvements ...
Working Paper
Net Income Measurement, Investor Inattention, and Firm Decisions
When investors have limited attention, does the way in which net income is measured matter for firm value and firms’ resource allocation decisions? This paper uses the Accounting Standards Update (ASU) 2016-01, which requires public firms to incorporate changes in unrealized gains and losses (UGL) on equity securities into net income, to answer this question. We build a model with risk-averse investors who can be attentive or inattentive and managers who choose how much to invest in financial assets to maximize firms’ stock prices. The model predicts that, with inattentive investors, ...
Working Paper
From Incurred Loss to Current Expected Credit Loss (CECL): Forensic Analysis of the Allowance for Loan Losses in nconditionally Cancelable Credit Card Portfolios
The Current Expected Credit Loss (CECL) framework represents a new approach for calculating the allowance for credit losses. Credit cards are the most common form of revolving consumer credit and are likely to present conceptual and modeling challenges during CECL implementation. We look back at nine years of account level credit card data, starting with 2008, over a time period encompassing the bulk of the Great Recession as well as several years of economic recovery. We analyze the performance of the CECL framework under plausible assumptions about allocations of future payments to existing ...
Journal Article
Public disclosure and risk-adjusted performance at bank holding companies
This article examines the relationship between the amount of information disclosed by bank holding companies (BHCs) and the BHCs? subsequent risk-adjusted performance. Using data from the annual reports of BHCs with large trading operations, the author constructs an index that quantifies the BHCs? public disclosure of forward-looking estimates of market risk exposure in their trading and market-making activities. She then examines the relationship between this index and subsequent risk-adjusted returns in the BHCs? trading activities and for the firm overall. The key finding is that more ...
Working Paper
Information Production, Misconduct Effort, and the Duration of Corporate Fraud
We develop and test a model linking the duration of financial fraud to information produced by auditors and analysts and efforts by managers to conceal the fraud. Our empirical results suggest fraud termination is more likely in the quarter following the release of audited financial statements, especially when reports contain explanatory language, indicating auditors? observable signals reduce fraud duration. Analyst attention increases the likelihood of fraud termination, but the marginal effect beyond the first analyst is negative, possibly due to free riding and herding behavior impairing ...
Journal Article
Transparency, accounting discretion, and bank stability
This article examines the consequences of accounting policy choices for individual banks? downside tail risk, for the codependence of such risk among banks, and for regulatory forbearance, or the decision by a regulator not to intervene. The author synthesizes recent research that provides robust empirical evidence for two effects of discretionary accounting policy choices by banks. First, these choices degrade transparency, an outcome that increases financing frictions, inhibits market discipline of bank risk taking, and allows regulatory forbearance. Second, they exacerbate capital adequacy ...