Mark-to-market accounting and liquidity pricing

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Mark-to-market accounting and liquidity pricing

Author Info

Allen, Franklin
Carletti, Elena

Additional information is available for the following registered author(s):

Franklin Allen

Abstract

When liquidity plays an important role as in financial crises, asset prices may reflect the amount of liquidity available rather than the asset's future earning power. Using market prices to assess financial institutions' solvency in such circumstances is not desirable. We show that a shock in the insurance sector can cause the current market value of banks' assets to fall below their liabilities so they are insolvent. In contrast, if values based on historic cost are used, banks can continue and meet all their future liabilities. We discuss the implications for the debate on mark-to-market versus historic cost accounting.

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Publisher Info
Article provided by Elsevier in its journal Journal of Accounting and Economics.

Volume (Year): 45 (2008)
Issue (Month): 2-3 (August)
Pages: 358-378
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Handle: RePEc:eee:jaecon:v:45:y:2008:i:2-3:p:358-378

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Paper
- Franklin Allen & Elena Carletti, 2006. "Mark-to-Market Accounting and Liquidity Pricing," CFS Working Paper Series 2006/17, Center for Financial Studies. [Downloadable!]

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Xavier Freixas & Dimitrios P. Tsomocos, 2004. "Book vs. Fair Value Accounting in Banking, and Intertemporal Smoothing," Economics Working Papers 771, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
Other versions:
- Xavier Freixas & Dimitrios P. Tsomocos, 2004. "Book vs. Fair Value Accounting in Banking, and Intertemporal Smoothing," OFRC Working Papers Series 2004fe13, Oxford Financial Research Centre. [Downloadable!]
Franklin Allen & Douglas Gale, 2005. "From Cash-in-the-Market Pricing to Financial Fragility," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 535-546, 04/05. [Downloadable!] (restricted)
Mark Carey & Rene M. Stulz, 2005. "The Risks of Financial Institutions," NBER Working Papers 11442, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Franklin Allen & Douglas Gale, 1976. "Optimal Financial Crises," Center for Financial Institutions Working Papers 97-01, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
Other versions:
- Franklin Allen & Douglas Gale, 1998. "Optimal Financial Crises," Journal of Finance, American Finance Association, vol. 53(4), pages 1245-1284, 08. [Downloadable!] (restricted)
O'Hara Maureen, 1993. "Real Bills Revisited: Market Value Accounting and Loan Maturity," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 51-76, October. [Downloadable!] (restricted)
Allen, Franklin & Carletti, Elena, 2006. "Credit risk transfer and contagion," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 89-111, January. [Downloadable!] (restricted)
Other versions:
- Franklin Allen & Elena Carletti, 2005. "Credit Risk Transfer and Contagion," CFS Working Paper Series 2005/25, Center for Financial Studies. [Downloadable!]

Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Luc Laeven & Harry Huizinga, 2009. "Accounting Discretion of Banks During a Financial Crisis," IMF Working Papers 09/207, International Monetary Fund. [Downloadable!]
Other versions:
- Huizinga, Harry & Laeven, Luc, 2009. "Accounting discretion of banks during a financial crisis," CEPR Discussion Papers 7381, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Philip Bond & Yaron Leitner, 2009. "Why do markets freeze?," Working Papers 09-24, Federal Reserve Bank of Philadelphia. [Downloadable!]
Opazo, Luis & Raddatz, Claudio & Schmukler, Sergio L., 2009. "The long and the short of emerging market debt," Policy Research Working Paper Series 5056, The World Bank. [Downloadable!]
Other versions:
- Luis Opazo & Claudio Raddatz & Sergio Schmukler, 2009. "The Long And The Short Of Emerging Market Debt," Working Papers Central Bank of Chile 530, Central Bank of Chile. [Downloadable!]

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