Fair value accounting for financial instruments: some implications for bank regulation
AbstractI identify issues that bank regulators need to consider if fair value accounting is used for determining bank regulatory capital and when making regulatory decisions. In financial reporting, US and international accounting standard setters have issued several disclosure and measurement and recognition standards for financial instruments and all indications are that both standard setters will mandate recognition of all financial instruments at fair value. To help identify important issues for bank regulators, I briefly review capital market studies that examine the usefulness of fair value accounting to investors, and discuss marking-to-market implementation issues of determining financial instruments' fair values. In doing so, I identify several key issues. First, regulators need to consider how to let managers reveal private information in their fair value estimates while minimising strategic manipulation of model inputs to manage income and regulatory capital. Second, regulators need to consider how best to minimise measurement error in fair values to maximise their usefulness to investors and creditors when making investment decisions, and to ensure bank managers have incentives to select investments that maximise economic efficiency of the banking system. Third, cross-country institutional differences are likely to play an important role in determining the effectiveness of using mark-to-market accounting for financial reporting and bank regulation.
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Bibliographic InfoPaper provided by Bank for International Settlements in its series BIS Working Papers with number 209.
Length: 32 pages
Date of creation: Aug 2006
Date of revision:
fair values; financial instruments; information asymmetry;
Find related papers by JEL classification:
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
This paper has been announced in the following NEP Reports:
- NEP-ACC-2007-06-18 (Accounting & Auditing)
- NEP-ALL-2007-06-18 (All new papers)
- NEP-BAN-2007-06-18 (Banking)
- NEP-HIS-2007-06-18 (Business, Economic & Financial History)
- NEP-REG-2007-06-18 (Regulation)
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.:
- Guillaume Plantin & Haresh Sapra & Hyun Shin, .
"Marking to Market: Panacea or Pandora’s Box ?,"
GSIA Working Papers
2005-E4, Carnegie Mellon University, Tepper School of Business.
- 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).
- Laux, Christian & Leuz, Christian, 2009. "The crisis of fair-value accounting: Making sense of the recent debate," Accounting, Organizations and Society, Elsevier, vol. 34(6-7), pages 826-834, August.
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