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Procyclicality and Fair Value Accounting

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  • Ms. Jodi G Scarlata
  • Mr. Juan Sole
  • Alicia Novoa

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, forward-looking 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

  • Ms. Jodi G Scarlata & Mr. Juan Sole & Alicia Novoa, 2009. "Procyclicality and Fair Value Accounting," IMF Working Papers 2009/039, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2009/039
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    2. Bengtsson, Elias, 2011. "Repoliticalization of accounting standard setting—The IASB, the EU and the global financial crisis," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 22(6), pages 567-580.
    3. Athanasoglou, Panayiotis P. & Daniilidis, Ioannis & Delis, Manthos D., 2014. "Bank procyclicality and output: Issues and policies," Journal of Economics and Business, Elsevier, vol. 72(C), pages 58-83.
    4. Huian Maria Carmen, 2012. "Accounting for Financial Assets and Financial Liabilities According to IFRS 9," Scientific Annals of Economics and Business, Sciendo, vol. 59(1), pages 27-47, July.
    5. Palea, Vera, 2018. "Financial reporting for sustainable development: Critical insights into IFRS implementation in the European Union," Accounting forum, Elsevier, vol. 42(3), pages 248-260.
    6. D. M. Nachane, 2016. "Global Crisis, Regulatory Reform and International Policy Coordination," South Asian Journal of Macroeconomics and Public Finance, , vol. 5(1), pages 63-95, June.
    7. Thomas Url, 2009. "Finanzmarktkrise: Entstehung, kurzfristige Reaktion und langfristiger Anpassungsbedarf," WIFO Monatsberichte (monthly reports), WIFO, vol. 82(12), pages 909-931, December.
    8. Lin, Karen Lai Kai & Konishi, Masaru, 2013. "Capital requirements, bank behavior and fair value accounting: Evidence from Japanese commercial banks," Working Paper Series G-1-6, Hitotsubashi University Center for Financial Research.
    9. Adam Gersl & Petr Jakubik, 2010. "Procyclicality of the Financial System and Simulation of the Feedback Effect," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2009/2010, chapter 0, pages 110-119, Czech National Bank.
    10. Volkova, O., 2018. "Fair Value in Finance: Fifty Shades of Fairness," Journal of the New Economic Association, New Economic Association, vol. 39(3), pages 85-109.
    11. Schröder, Michael & Riedler, Jesper & Jaroszek, Lena & Lang, Gunnar & Hommel, Paul & Voll, Sebastian Simon, 2011. "Assessment of the cumulative impact of various regulatory initiatives on the European banking sector: Study," ZEW Expertises, ZEW - Leibniz Centre for European Economic Research, number 110523.
    12. Panayiotis P. Athanasoglou & Ioannis Daniilidis, 2011. "Procyclicality in the banking industry: causes, consequences and response," Working Papers 139, Bank of Greece.
    13. R. Brian Langrin & Lavern McFarlane, 2014. "Policy Implications for the Application of Countercyclical Capital Buffers When the Government Borrowing Crowds Out Private Sector Credit: The Case of Jamaica," Monetaria, Centro de Estudios Monetarios Latinoamericanos, CEMLA, vol. 0(2), pages 285-312, July-Dece.

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