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Fair value accounting and financial stability

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  • Plantin, G.
  • Sapra, H.
  • Shin, H S.
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    Abstract

    Market prices give timely signals that can aid decision making. However, in the presence of distorted incentives and illiquid markets, there are other less benign effects that inject artifi cial volatility to prices that distorts real decisions. In a world of marking-to-market, asset price changes show up immediately on the balance sheets of financial intermediaries and elicit responses from them. Banks and other intermediaries have always responded to changes in economic environment, but marking-to-market sharpens and synchronises their responses, adding impetus to the feedback effects in financial markets. For junior assets trading in liquid markets (such as traded stocks), marking-to-market is superior to historical cost in terms of the trade-offs. But for senior, long-lived and illiquid assets and liabilities (such as bank loans and insurance liabilities), the harm caused by distortions can outweigh the benefi ts. We review the competing effects and weigh the arguments.

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    File URL: http://www.banque-france.fr/fileadmin/user_upload/banque_de_france/publications/Revue_de_la_stabilite_financiere/etud9_1008.pdf
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    Bibliographic Info

    Article provided by Banque de France in its journal Financial stability review.

    Volume (Year): (2008)
    Issue (Month): 12 (October)
    Pages: 85-94

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    Handle: RePEc:bfr:fisrev:2008:12:9

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    Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
    Web page: http://www.banque-france.fr/
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    Cited by:
    1. Laux, Christian & Leuz, Christian, 2009. "The crisis of fair value accounting: Making sense of the recent debate," CFS Working Paper Series 2009/09, Center for Financial Studies (CFS).
    2. Athanasoglou, Panayiotis & Ioannis, Daniilidis & Manthos, Delis, 2013. "Bank procyclicality and output: Issues and policies," MPRA Paper 50830, University Library of Munich, Germany.
    3. Claudio Borio, 2009. "Ten propositions about liquidity crises," BIS Working Papers 293, Bank for International Settlements.

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