Accounting, prudential regulation and financial stability: elements of a synthesis
What information about the financial condition of firms is conducive to efficient and stable operation of the financial system and of the economy more broadly? In this essay, we outline the contours of an ideal set of such information, identify existing gaps and propose a way forward to fill them. We argue that an ideal set should comprise two dimensions. As regards financial characteristics, it should cover three different types, viz: estimates of the current financial condition ("first-moment information"); estimates of risk profiles ("risk information"); and measures of the uncertainty surrounding both kinds of estimate ("measurement error information"). As regards the object of the analysis, it should cover information about both the individual firm ("micro information") and, suitably aggregated, the "system" as a whole ("macro information"). So far, efforts have mainly focused on micro information and, within it, on estimates of the current financial condition; by contrast, risk information has drawn attention only more recently and measurement error information has been largely neglected. We also note that, as regards micro information, significant differences in perspective between accounting standard setters and prudential supervisors have come to light. We examine the reasons for these differences and propose ways in which they could be reconciled. We propose a strategy based on two principles: first, in the long term, the "decoupling" of the objective of accurate financial reporting about the firm from that of instilling the desired degree of prudence in its behaviour; and second, a "parallel" process towards that objective so that at all points the prudential authorities can neutralise any undesirable implications for financial stability of changes in financial reporting standards. We stress that close cooperation between accounting standard setters and supervisory authorities is called for both in developing the final set of information and in implementing it.
|Date of creation:||Sep 2005|
|Contact details of provider:|| Postal: Centralbahnplatz 2, CH - 4002 Basel|
Phone: (41) 61 - 280 80 80
Fax: (41) 61 - 280 91 00
Web page: http://www.bis.org/
More information through EDIRC
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.:
- Charles Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004.
"A time series analysis of financial fragility in the UK banking system,"
LSE Research Online Documents on Economics
24778, London School of Economics and Political Science, LSE Library.
- Charles Goodhart & Pojanart Sunirand & Dimitrios Tsomocos, 2006. "A Time Series Analysis of Financial Fragility in the UK Banking System," Annals of Finance, Springer, vol. 2(1), pages 1-21, January.
- Charles A.E. Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004. "A Time Series Analysis of Financial Fragility in the UK Banking System," OFRC Working Papers Series 2004fe18, Oxford Financial Research Centre.
- Upper, Christian & Worms, Andreas, 2004.
"Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?,"
European Economic Review,
Elsevier, vol. 48(4), pages 827-849, August.
- Christian Upper & Andreas Worms, 2001. "Estimating bilateral exposures in the German interbank market: is there a danger of contagion?," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 211-229 Bank for International Settlements.
- Upper, Christian & Worms, Andreas, 2002. "Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?," Discussion Paper Series 1: Economic Studies 2002,09, Deutsche Bundesbank, Research Centre.
- Claudio E. V. Borio, 2003.
"Towards a macroprudential framework for financial supervision and regulation?,"
BIS Working Papers
128, Bank for International Settlements.
- Claudio Borio, 2003. "Towards a Macroprudential Framework for Financial Supervision and Regulation?," CESifo Economic Studies, CESifo, vol. 49(2), pages 181-215.
- Danielsson, Jon & Shin, Hyun Song & Zigrand, Jean-Pierre, 2004.
"The impact of risk regulation on price dynamics,"
Journal of Banking & Finance,
Elsevier, vol. 28(5), pages 1069-1087, May.
- Helmut Elsinger & Alfred Lehar & Martin Summer, 2006.
"Risk Assessment for Banking Systems,"
INFORMS, vol. 52(9), pages 1301-1314, September.
- Hirshleifer, David & Teoh, Siew Hong, 2003. "Limited attention, information disclosure, and financial reporting," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 337-386, December.
- John R. Graham & Campbell R. Harvey & Shiva Rajgopal, 2004.
"The Economic Implications of Corporate Financial Reporting,"
NBER Working Papers
10550, National Bureau of Economic Research, Inc.
- Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
- Jeffery D Amato & Jacob Gyntelberg, 2005. "CDS index tranches and the pricing of credit risk correlations," BIS Quarterly Review, Bank for International Settlements, March.
When requesting a correction, please mention this item's handle: RePEc:bis:biswps:180. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Beslmeisl)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.