The Real Effects of FAS 166/167 on Banks’ Mortgage Approval and Sale Decisions

Yiwei Dou, Stephen G. Ryan, Biqin Xie

Research output: Contribution to journalArticle

4 Citations (Scopus)

Abstract

We examine the real effects of FAS 166 and FAS 167 on banks’ loan-level mortgage approval and sale decisions. Effective in 2010, these standards tightened the accounting for securitizations and consolidation of securitization entities, respectively, causing banks to recognize an estimated $811 billion of securitized assets on balance sheet. We find that banks that recognize more securitized assets exhibit larger decreases in mortgage approval rates and larger increases in mortgage sale rates. These effects significantly exceed those of banks’ off–balance sheet securitized assets, consistent with our results being driven by the consolidation of securitization entities rather than by securitization per se. We conduct tests that help rule out the financial crisis as an alternative explanation for our results. Further analyses suggest that mechanisms underlying the results include consolidating banks’ reduced regulatory capital adequacy, increased market discipline, and consequent desire not to recognize high-risk mortgages on balance sheet.

Original languageEnglish (US)
Pages (from-to)843-882
Number of pages40
JournalJournal of Accounting Research
Volume56
Issue number3
DOIs
StatePublished - Jun 1 2018

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Mortgages
Securitization
Assets
Balance sheet
Consolidation
Bank loans
Financial crisis
Capital adequacy
Market discipline
Regulatory capital

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

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abstract = "We examine the real effects of FAS 166 and FAS 167 on banks’ loan-level mortgage approval and sale decisions. Effective in 2010, these standards tightened the accounting for securitizations and consolidation of securitization entities, respectively, causing banks to recognize an estimated $811 billion of securitized assets on balance sheet. We find that banks that recognize more securitized assets exhibit larger decreases in mortgage approval rates and larger increases in mortgage sale rates. These effects significantly exceed those of banks’ off–balance sheet securitized assets, consistent with our results being driven by the consolidation of securitization entities rather than by securitization per se. We conduct tests that help rule out the financial crisis as an alternative explanation for our results. Further analyses suggest that mechanisms underlying the results include consolidating banks’ reduced regulatory capital adequacy, increased market discipline, and consequent desire not to recognize high-risk mortgages on balance sheet.",
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The Real Effects of FAS 166/167 on Banks’ Mortgage Approval and Sale Decisions. / Dou, Yiwei; Ryan, Stephen G.; Xie, Biqin.

In: Journal of Accounting Research, Vol. 56, No. 3, 01.06.2018, p. 843-882.

Research output: Contribution to journalArticle

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