IDEAS home Printed from https://ideas.repec.org/p/bis/biswps/180.html
   My bibliography  Save this paper

Accounting, prudential regulation and financial stability: elements of a synthesis

Author

Listed:
  • Claudio E. V. Borio
  • Kostas Tsatsaronis

Abstract

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.

Suggested Citation

  • Claudio E. V. Borio & Kostas Tsatsaronis, 2005. "Accounting, prudential regulation and financial stability: elements of a synthesis," BIS Working Papers 180, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:180
    as

    Download full text from publisher

    File URL: http://www.bis.org/publ/work180.pdf
    File Function: Full PDF document
    Download Restriction: no

    File URL: http://www.bis.org/publ/work180.htm
    Download Restriction: no

    References listed on IDEAS

    as
    1. Claudio Borio, 2003. "Towards a Macroprudential Framework for Financial Supervision and Regulation?," CESifo Economic Studies, CESifo, vol. 49(2), pages 181-215.
    2. Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Risk Assessment for Banking Systems," Management Science, INFORMS, vol. 52(9), pages 1301-1314, September.
    3. 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.
    4. 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.
    5. repec:bla:joares:v:37:y:1999:i::p:53-87 is not listed on IDEAS
    6. 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.
    7. 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.
    8. Jeffery D Amato & Jacob Gyntelberg, 2005. "CDS index tranches and the pricing of credit risk correlations," BIS Quarterly Review, Bank for International Settlements, March.
    9. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ilhyock Shim & Goetz von Peter, 2007. "Distress selling and asset market feedback," BIS Working Papers 229, Bank for International Settlements.
    2. Vincent Fleuriet & Catherine Lubochinsky, 2006. "Marchés d’actions et stabilité financière : les enjeux de la régulation," Revue d'Économie Financière, Programme National Persée, vol. 82(1), pages 251-261.
    3. Vincent Fleuriet & Catherine Lubochinsky, 2006. "Equity markets and financial stability : regulatory issues," Revue d'Économie Financière, Programme National Persée, vol. 82(1), pages 231-240.
    4. Jodi G. Scarlata & Juan Sole & Alicia Novoa, 2009. "Procyclicality and Fair Value Accounting," IMF Working Papers 09/39, International Monetary Fund.
    5. Schwarz Claudia & Karakitsos Polychronis & Merriman Niall & Studener Werner, 2015. "Why Accounting Matters: A Central Bank Perspective," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 5(1), pages 1-42, March.

    More about this item

    Keywords

    risk management; financial stability; accounting; disclosure; prudential regulation; information; financial reporting;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G00 - Financial Economics - - General - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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). General contact details of provider: http://edirc.repec.org/data/bisssch.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.