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Fair value accounting and financial stability

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Abstract

Accounting standard setters are considering the wider use of fair value accounting. This paper focuses on the financial stability implications of a move in the banking sector from the current accounting framework to full fair value accounting. A simulation exercise is performed on how various external shocks affect the balance sheet of an average European bank under the two frameworks. The paper further investigates the impact of the alternative framework on the main balance sheet items, and the interaction with banks’ risk management, supervisory tools and statistical requirements. It also examines how the application of fair value accounting to banks’ trading book has impacted their share price volatility. It is concluded that the introduction of full fair value accounting could have a significant effect in terms of income volatility, procyclicality of bank lending and more generally financial stability. Hence, any move towards this alternative accounting framework should be gradual.

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Bibliographic Info

Paper provided by European Central Bank in its series Occasional Paper Series with number 13.

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Length: 48 pages
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:ecb:ecbops:20040013

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Keywords: accounting; banks; fair value; financial regulation; financial reporting; financial stability; risk management.;

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Cited by:
  1. Bouvatier, Vincent & Lepetit, Laetitia, 2008. "Banks' procyclical behavior: Does provisioning matter?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(5), pages 513-526, December.
  2. 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.
  3. Reint Gropp & Arjan Kadareja, 2006. "Stale information, shocks and volatility," Working Paper Series 686, European Central Bank.
  4. Vincent Bouvatier & Laetitia Lepetit, 2006. "Banks' procyclicality behavior : does provisioning matter ?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00115622, HAL.
  5. Nessrine Ben Hamida, 2007. "Évaluation Empirique Des Impacts Des Évenements Ayant Abouti À L'Adoption De L'Ias 39 Sur Les Cours Boursiers Des Banques Françaises Cotées," Post-Print halshs-00543075, HAL.
  6. Ben Hamida, Nessrine, . "Evaluation empirique des impacts des événements ayant abouti à l'adoption de l'IAS 39 sur les cours boursiers des banques françaises cotées," Open Access publications from Université Paris-Dauphine urn:hdl:123456789/2329, Université Paris-Dauphine.
  7. Bannier, Christina E., 2007. "Smoothing versus timeliness - wann sind stabile Ratings optimal und welche Anforderungen sind an optimale Berichtsregeln zu stellen?," Frankfurt School - Working Paper Series 84, Frankfurt School of Finance and Management.
  8. Lenz, Rainer, 2011. "Get rid of banks and build up a modern financial world," MPRA Paper 33501, University Library of Munich, Germany.
  9. Jodi G. Scarlata & Juan Sole & Alicia Novoa, 2009. "Procyclicality and Fair Value Accounting," IMF Working Papers 09/39, International Monetary Fund.
  10. Roland Strausz & Katrin Burkhardt, . "The Effect of Fair vs. Book Value Accounting on the Behavior of Banks," Papers 024, Departmental Working Papers.
  11. Salvary, Stanley C. W., 2007. "Accounting: A General Commentary on an Empirical Science," MPRA Paper 5005, University Library of Munich, Germany, revised 10 Sep 2007.
  12. Angela Maddaloni & Darren Pain, 2004. "Corporate ‘excesses’ and financial market dynamics," Occasional Paper Series 17, European Central Bank.

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