Real Activity Forecasts Using Loan Portfolio Information

Khan, Urooj; Ozel, N. Bugra

doi:10.2139/ssrn.2723414

Cited by 9 publications

(10 citation statements)

References 52 publications

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“…To further rule out the effect of geographical diversification or consolidation, in general, as a confounding influence in my tests, I reestimate equation after removing from the sample banks that began operations in a new state or shut operations in a given state during my sample period. I use the Summary of Deposits data to identify changes in banks' branch network (e.g., Khan and Ozel ). My inferences are unchanged.…”

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confidence: 99%

Does Fair Value Accounting Contribute to Systemic Risk in the Banking Industry?

Khan¹

2019

Contemporary Accting Res

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I investigate whether fair value accounting can contribute to the banking industry's systemic risk. I focus on the adoption of Statement of Financial Accounting Standard No. 115 (SFAS No. 115), which required available‐for‐sale (AFS) securities to be recognized at fair value with unrealized gains and losses included in equity through accumulated other comprehensive income. SFAS No. 115 increased banks' regulatory risk because, at the time, calculation of regulatory capital closely conformed with GAAP equity. I find that systemic risk increased following the adoption of SFAS No. 115. Furthermore, following a subsequent regulatory amendment—which excluded unrealized gains and losses on AFS securities from regulatory capital but did not change their GAAP treatment—systemic risk decreased. Taken together, the evidence suggests that fair value accounting has the potential to increase systemic risk through the explicit inclusion of volatile fair value estimates in regulatory bank capital adequacy assessments. I do not, however, find evidence of fair value accounting impacting systemic risk in its information role; that is, by providing information to a bank's external stakeholders about its financial position and performance. I also show that higher fair value volatility of investment securities, lower bank capital, and larger AFS security holdings increase banks' marginal contribution to systemic risk. My findings should interest regulators and policymakers, as recent regulatory changes in light of Basel III recommendations require unrealized gains and losses on AFS securities to be included in regulatory capital for advanced approaches banks.

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confidence: 99%

Does Fair Value Accounting Contribute to Systemic Risk in the Banking Industry?

Khan¹

2019

Contemporary Accting Res

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“…More broadly, this article is part of the burgeoning recent literature that links accounting data to the macroeconomy. Examples include Konchitchki (2011Konchitchki ( , 2013 and Shivakumar and Urcan (2017), which explore the relation between inflation and earnings; Khan and Ozel (2016), which shows that aggregated information about loan losses helps predict economic activity at the state level; Konchitchki, Luo, Ma, and Wu (2016), which investigates earnings downside risk and cost of equity capital; and Patatoukas (2014), which examines the implications of aggregate accounting earnings for stock market valuation. Although this literature has produced a number of insights, significant research opportunities remain in this area, including more use of national-accounts data like NIPA.…”

Section: Introductionmentioning

confidence: 99%

Comparing GAAP With NIPA Earnings

Dichev

Zhao

2019

Journal of Accounting, Auditing & Finance

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The U.S. Bureau of Economic Analysis produces a measure of aggregate corporate profits (national income and product accounts [NIPA] earnings), which is an integral component of the accounting for gross domestic product (GDP). Interesting features of NIPA earnings include consistent accounting rules over time and determination with little or no managerial discretion. Thus, NIPA earnings provide a useful benchmark for generally accepted accounting principles (GAAP) earnings, especially in parsing out the effects of real-economy versus the accounting in explaining the documented temporal increase in volatility and decline in persistence of GAAP earnings. We find that GAAP and NIPA earnings are closely related in the early years, with similar means and standard deviations, and with earnings changes correlating at .90 during 1950-1983. This close relation substantially deteriorates, however, during the second half of the sample period, 1984-2016. Although the behavior of NIPA earnings remains roughly the same, the volatility of GAAP earnings increases 10-fold, and the correlation between GAAP and NIPA earnings changes falls to .39. Additional tests reveal that the increase in the volatility of GAAP earnings is mostly due to rapid earnings reversals, especially the effect of large transient items during economic downturns. The frequency and severity of such downturns, however, are roughly the same across the two periods. In addition, there is little change in the properties of aggregate cash flow from operations and revenue over time. Overall, this evidence suggests that in addition to changes in the real economy, changing GAAP rules and their application are significant factors in the changing properties of GAAP earnings.

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“…For most banks, lending is the main source of value creation and risk, with economic profitability determined by the yield charged relative to cost of funds and credit risk realized. Accounting researchers have long studied the information contained in the various loan and related credit risk disclosures (e.g., Wahlen 1994; Barth et al 1996;Nissim 2003; Khan and Ozel 2016) and in the wake of the 2007-2009 financial crisis, interest in the analysis of credit risk in banks has surged (e.g., Blankespoor et al 2013;Cantrell et al 2014). This interest goes beyond the academic literature.…”

Section: Introductionmentioning

confidence: 99%

The Expected Rate of Credit Losses on Banks' Loan Portfolios

Harris

Khan

Nissim

2018

The Accounting Review

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Estimating expected credit losses on banks' portfolios is difficult. The issue has become of increasing interest to academics and regulators with the FASB and IASB issuing new regulations for loan impairment. We develop a measure of the one-year-ahead expected rate of credit losses (ExpectedRCL) that combines various measures of credit risk disclosed by banks. It uses cross-sectional analyses to obtain coefficients for estimating each period's measure of expected credit losses. ExpectedRCL substantially outperforms net charge-offs in predicting one-year-ahead realized credit losses, and reflects nearly all the credit loss-related information in the charge-offs. ExpectedRCL also contains incremental information about one-year-ahead realized credit losses relative to the allowance and provision for loan losses and the fair value of loans. It is a better predictor of the provision for loan losses than analyst provision forecasts, and is incrementally useful beyond other credit risk metrics in predicting bank failure up to one year ahead.

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Real Activity Forecasts Using Loan Portfolio Information

Cited by 9 publications

References 52 publications

Does Fair Value Accounting Contribute to Systemic Risk in the Banking Industry?

Does Fair Value Accounting Contribute to Systemic Risk in the Banking Industry?

Comparing GAAP With NIPA Earnings

The Expected Rate of Credit Losses on Banks' Loan Portfolios

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