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Fair value accounting and procyclicality: mitigating regulatory and accounting policy differences through regulatory structure reforms and Enforced Self Regulation

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  • Ojo, Marianne

Abstract

In what ways can changes to the structure of regulation (as well as other regulatory reforms) mitigate the effects of policies which trigger financial instability? More specifically policies, information asymmetries or externalities which could give rise to bank contagion, systemic/liquidity risks or procyclical effects? Whilst acknowledging that accounting standards play a fundamental role in addressing problems which could contribute to information asymmetries and ultimately systemic risks, this paper also highlights why the type of regulatory structure, clear allocation of responsibilities between regulators, as well as measures aimed at fostering accountability, constitute vital elements which could serve as safeguards in mitigating procyclical effects (as well as other factors) which could trigger financial instability. In achieving this aim, the paper focusses on the rationale for fair value accounting, as well as problematic issues arising from its implementation. The adoption of international accounting standards is considered to have a vital role in contributing to financial stability. This paper will also illustrate how the implementation of accounting standards and policies, in certain instances, have contrasted with Basel Committee initiatives aimed at mitigating procyclicality and facilitating forward looking provisioning. More importantly, the paper will highlight how and why differences between regulatory and accounting policies could (and should) be mitigated.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 29314.

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Date of creation: 05 Mar 2011
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Handle: RePEc:pra:mprapa:29314

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Related research

Keywords: stability; liquidity risks; systemic risks; pro cyclicality; fair values; information; certainty; regulation; central banks; accountability; macro prudential regulation;

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  1. Luc Laeven & Giovanni Majnoni, 2002. "Loan loss provisioning and economic slowdowns: too much too late?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
  2. Rolf H. Weber, 2010. "Multilayered Governance in International Financial Regulation and Supervision," Journal of International Economic Law, Oxford University Press, vol. 13(3), pages 683-704, September.
  3. Andrea Prat, 2002. "The Wrong Kind of Transparency," STICERD - Theoretical Economics Paper Series 439, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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