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Fair value accounting and financial stability

Author

Listed:
  • Andrea Enria
  • Lorenzo Cappiello
  • Frank Dierick
  • Sergio Grittini
  • Andrew Haralambous
  • Angela Maddaloni
  • Philippe Molitor
  • Fatima Pires
  • Paolo Poloni

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.

Suggested Citation

  • Andrea Enria & Lorenzo Cappiello & Frank Dierick & Sergio Grittini & Andrew Haralambous & Angela Maddaloni & Philippe Molitor & Fatima Pires & Paolo Poloni, 2004. "Fair value accounting and financial stability," Occasional Paper Series 13, European Central Bank.
  • Handle: RePEc:ecb:ecbops:20040013
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    File URL: http://www.ecb.europa.eu/pub/pdf/scpops/ecbocp13.pdf
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    More about this item

    Keywords

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

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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