This page has been archived and commenting is disabled.
Harvard Study Confirms Level 3 Assets Burden Bank Balance Sheets, Lead To Information Uncertainty
An interesting paper out of Harvard Business School that focuses on the information opacity in various asset disclosure classes (Level 1-3), concurrent with some interesting conclusions. From the abstract:
Finance theory suggests that information risk?that is, the uncertainty regarding valuation parameters for an underlying asset?is reflected in firms’ equity betas and the information asymmetry component of bid-ask spreads. We empirically examine these predictions for a sample of large U.S. banks, exploiting recent mandatory disclosures of financial instruments designated as fair value level 1, 2, and 3, which indicate progressively more illiquid and opaque financial instruments. Consistent with predictions, results reveal that portfolios of level 3 financial assets have higher implied betas and lead to larger bid-ask spreads relative to those designated as level 1 or level 2 assets. Both results are consistent with a higher cost of capital for banks holding more opaque financial assets, as reflected by the level 3 fair value designation.
Nothing earthshattering here, however, it does reinforce the threat that as banks move increasingly more assets to the the mark-to-model Level 3 category, so as to hide the true sad state of their asset exposure, entire security classes that reference the specific balance sheet (think stocks) will likely end up becoming increasingly volatile, as the bank itself is perceived as merely a proxy for unlimited, opaque and likely mismarked Level 3 holdings.
Our results suggest that concerns surrounding the measurement and reporting of illiquid financial instruments appear warranted. Specifically, the evidence suggests that current disclosures surrounding these financial instruments are insufficient to mitigate investor perceptions of greater information risk for highly opaque financial assets. This suggests that further regulation may be warranted, included enhancements to the disclosures particularly for financial instruments reported at level 3 fair value. Our results also suggest that future movements to incorporate risk-weighted regulatory capital, particularly in which illiquid financial instruments receive higher risk weightings, appear justified.
Full paper here:
»
- 4681 reads
- Printer-friendly version
- Send to friend
- advertisements -
Man the pumps!
Hearing FDIC is in Corus Bank today..not good sign
golly gee...I wonder what happens if all of the off-balance sheet shit comes back ON balance and real, true accounting comes back into vogue?
Maybe a fair and level playing field for all, once all the greedy bastards go away...
So not knowing for sure that the banksters are too bankrupt to go broke but having enough common sense to suppose that a nickel is worth a nickel and not par results in information risk?
Yeah...
Cognitive dissonance and learned helplessness leads to cognitive helplessness and learned dissonance.
Mises said so hundred years ago: No prices, No market! Harvard would not be Harvard if they did not ask for the wrong solution: more regulations and more socialism.
did anyone see the CNBC clip from Paul Wilmott?
Good god, larry Kudlow needs to be taken out back and put to sleep, that guy is clueless....
Here Wilmott was talking current risk in the markets and all Larry the mouth, wanted his viewers to hear was what undervalued sector to buy
Why ooh why did I turn on that channel?!?
krudblow has a surgically attached dildo in his
mouth....you can be sure that anything that
moron blows comes straight from his asshole...
Yes, we need a Harvard paper to tell us lying is bad. Some first graders already know that.
Can you believe it? My Harvard tie.
Like, oh sure, he went to Harvard.
If he's being driven around in my car,
he could actually be living in my house.
Maybe he's even taken my job.
For all I know, right at this moment
he could be fondling my fiancée.
Finance people always like to use clever language to down play what is actually a smelly, stinky turd.
Totally agree. But every time that Sham-Wow guy comes on Bloomberg, I'm forced to switch back.
<remaining content removed by Sacrilege>
it took a study to demonstrate that opaque financial information causes uncertainty and volatility? that is the definition of imbecility....and then the solution is more regulation?? bitch please....
there is not a shred of financial information which should not be disclosed on the balance sheet and income statement....off balance sheet accounting is a total fraud...but such is the fire economy - dishonest academics dressing up fraud as honesty...
financial reporting is so byzantine by design so as to fool and bamboozle the financially illiterate which is practically everyone....