Have SFAS 166 and SFAS 167 improved the financial reporting for securitizations?

Critics have alleged that securitization accounting prior to 2010 was among the causes of the recent financial crisis. In response to this criticism, the Financial Accounting Standards Board (FASB) implemented two new accounting standards, SFAS 166 and SFAS 167, to improve the financial reporting for securitizations. Bank regulators have stated their belief that SFAS 166/167 will result in a consolidated balance sheet (and risk-based capital ratios based thereupon) that better reflects a bank’s exposure to risk related to securitized assets. We document that, by ceding retained power or influence through the servicing / special servicing functions to third parties, SFAS 166/167 resulted in real effects to the extent that banks (particularly those that were weakly capitalized) achieved their accounting objectives in the post-SFAS 166/167 period through legitimate transaction structuring in line with the intent of the new rules. Further, we use capital market participants’ assessments of risk retention by sponsoring banks as a benchmark, and provide evidence consistent with bank regulators’ beliefs. In particular, following SFAS 166/167, equity investors of sponsoring banks do not consider (consider) as risk relevant securitized assets that receive off-balance sheet (on-balance sheet) treatment. Securitized assets that are consolidated under SFAS 166/167 exhibit the same risk relevance as assets that are not securitized, despite contractual provisions that would seem to imply substantial risk transfer.

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Work Title Have SFAS 166 and SFAS 167 improved the financial reporting for securitizations?
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Penn State
Creators
  1. Samuel Bonsall
Keyword
  1. securitization
  2. securitization accounting
  3. FASB
  4. SFAS 166 and 167
  5. financial reporting
  6. off-balance sheet
  7. risk relevance
  8. real effects
License All rights reserved
Work Type Article
Acknowledgments
  1. We are grateful to Cathy Shakespeare (the Editor) and an anonymous referee for their valuable insights. The paper has benefited from remarks by Anne Beatty, Jeff Callen, Matthew Cedergren (discussant), Ole-Kristian Hope, Stephen Ryan, Joshua Ronen, Helen Zhang, participants at the 2015 AAA annual meeting in Chicago, the 2015 CFEA conference at Rutgers, the 2015 Accounting Research Conference at Brock University, the 2017 Rotman Annual Accounting conference, as well as brownbag workshop participants at the University of Toronto. All errors are our own. Richardson and Vyas gratefully acknowledge funding from the Canadian Academic Accounting Association and the Social Sciences and Humanities Research Council of Canada. Gordon Richardson would like to thank KPMG for their generous support.
Publication Date August 6, 2020
Deposited February 25, 2021 10:48

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  • Created
  • Updated Acknowledgments Show Changes
    Acknowledgments
    • We are grateful to Cathy Shakespeare (the Editor) and an anonymous referee for their valuable insights. The paper has benefited from remarks by Anne Beatty, Jeff Callen, Matthew Cedergren (discussant), Ole-Kristian Hope, Stephen Ryan, Joshua Ronen, Helen Zhang, participants at the 2015 AAA annual meeting in Chicago, the 2015 CFEA conference at Rutgers, the 2015 Accounting Research Conference at Brock University, the 2017 Rotman Annual Accounting conference, as well as brownbag workshop participants at the University of Toronto. All errors are our own. Richardson and Vyas gratefully acknowledge funding from the Canadian Academic Accounting Association and the Social Sciences and Humanities Research Council of Canada. Gordon Richardson would like to thank KPMG for their generous support.
  • Added Creator Samuel Bonsall
  • Added SFAS 166 167.pdf
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    • https://rightsstatements.org/page/InC/1.0/
  • Published