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Financial stability, fair value accounting, and procyclicality

Author

Listed:
  • Sole, Juan

    (IMF)

  • Scarlata, Jodi

    (IMF)

  • Novoa, Alicia

    (IMF)

Abstract

In light of the uncertainties about valuation highlighted by the 2007–2008 market turbulence, this paper provides an empirical examination of the potential procyclicality that fair value accounting (FVA) could introduce in bank balance sheets. The paper finds that, while weaknesses in the FVA methodology may introduce unintended procyclicality, it is still the preferred framework for financial institutions. It concludes that capital buffers, forwardlooking provisioning, and more refined disclosures can mitigate the procyclicality of FVA. Going forward, the valuation approaches for accounting, prudential measures, and risk management need to be reconciled and will require adjustments on the part of all parties.

Suggested Citation

  • Sole, Juan & Scarlata, Jodi & Novoa, Alicia, 2010. "Financial stability, fair value accounting, and procyclicality," Journal of Financial Transformation, Capco Institute, vol. 28, pages 61-75.
    • Handle: RePEc:ris:jofitr:1417
    as

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    More about this item

    Keywords

    Financial Stability; Fair Value Accounting; Procyclicality;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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