The Decision Relevance of Loan Fair Values for Depositors

Using a large sample of U.S. commercial banks from 1994-2019, we find that loan fair value changes are highly relevant for depositor decision-making: a one-standard-deviation decrease in fair values is associated with 10% lower uninsured deposit flows than the sample average. However, the information in fair values about loan quality is limited and does not fully explain the relevance of fair values for depositors. Furthermore, the relevance manifests more strongly in banks where depositors’ incentives to withdraw money before other depositors (i.e., strategic complementarities) are stronger. The findings inform the cost-benefit trade-off of reporting loan fair values.