Mark-to-Market, Loan Retention, and Loan Origination

Forthcoming at The Accounting Review

Posted: 18 Nov 2009 Last revised: 10 May 2023

See all articles by Alexander Bleck

Alexander Bleck

University of British Columbia - Sauder School of Business

Pingyang Gao

HKU Business School

Chicago Booth RPS Submitter

University of Chicago - Booth School of Business

Date Written: September 1, 2022

Abstract

We study the effects of mark-to-market accounting (MTM) on banks’ loan origination and retention decisions. We point out a conceptual shortcoming of MTM. Loan prices are informative in equilibrium but this price discovery is sustained by the good banks’ costly retention. The attempt to exploit the information in equilibrium prices through MTM makes price discovery more costly or even impossible. We show that, relative to historic cost accounting (HC), MTM has three consequences. First, it improves the accuracy of loan valuation ex post. Second, it forces the good banks to retain even more risk exposure on their balance sheet. Finally, it can reduce ex-ante origination efforts. To the extent that a lower loan quality and banks’ excessive risk exposure are two important ingredients for financial crises, we identify one mechanism through which MTM could contribute to financial crises.

Keywords: Mark-to-market accounting, historic cost accounting, loan quality, financial crisis

JEL Classification: G01, G21, G30, M41

Suggested Citation

Bleck, Alexander and Gao, Pingyang and RPS Submitter, Chicago Booth, Mark-to-Market, Loan Retention, and Loan Origination (September 1, 2022). Forthcoming at The Accounting Review, Available at SSRN: https://ssrn.com/abstract=1507342 or http://dx.doi.org/10.2139/ssrn.1507342

Alexander Bleck

University of British Columbia - Sauder School of Business ( email )

Canada

Pingyang Gao (Contact Author)

HKU Business School ( email )

Hong Kong
China

Chicago Booth RPS Submitter

University of Chicago - Booth School of Business

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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