The Issue of Transparency in the Financial Statements of Commercial Banks: Empirical Evidence after the Global Financial Crisis

Abstract

The debate on the applicability of Fair Value Accounting has resurfaced after the Global Financial Crisis. This study contributes to this debate by empirically comparing the effects when the fair value changes of financial instruments disclosed in the notes are considered in the primary financial statements. The study’s sample is four major Australian banks and four of the largest American banks and covers the period from 2005 to 2010. The results show that  Comprehensive Income of the sample banks is extremely negatively affected by fair value changes. Shareholders’ Equity is also negatively affected, although the effects are not material. These findings indicate that, from a market value perspective, the underlying performance and risks of commercial banks are not properly reflected in the financial statements. By contrast, as a consequence of high holdings of regulatory capital, fair value changes do not trigger violations of Tier 1 Capital Ratio and Total Capital Ratio. Similar results are found for American banks when capital injections from the Troubled Assets Relief Programme are excluded.