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Fair value accounting and procyclicality: mitigating regulatory and accounting policy differences through regulatory structure reforms and Enforced Self Regulation

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  • Ojo, Marianne

Abstract

In what ways can changes to the structure of regulation (as well as other regulatory reforms) mitigate the effects of policies which trigger financial instability? More specifically policies, information asymmetries or externalities which could give rise to bank contagion, systemic/liquidity risks or procyclical effects? Whilst acknowledging that accounting standards play a fundamental role in addressing problems which could contribute to information asymmetries and ultimately systemic risks, this paper also highlights why the type of regulatory structure, clear allocation of responsibilities between regulators, as well as measures aimed at fostering accountability, constitute vital elements which could serve as safeguards in mitigating procyclical effects (as well as other factors) which could trigger financial instability. In achieving this aim, the paper focusses on the rationale for fair value accounting, as well as problematic issues arising from its implementation. The adoption of international accounting standards is considered to have a vital role in contributing to financial stability. This paper will also illustrate how the implementation of accounting standards and policies, in certain instances, have contrasted with Basel Committee initiatives aimed at mitigating procyclicality and facilitating forward looking provisioning. More importantly, the paper will highlight how and why differences between regulatory and accounting policies could (and should) be mitigated.

Suggested Citation

  • Ojo, Marianne, 2011. "Fair value accounting and procyclicality: mitigating regulatory and accounting policy differences through regulatory structure reforms and Enforced Self Regulation," MPRA Paper 29314, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:29314
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    File URL: https://mpra.ub.uni-muenchen.de/29314/1/MPRA_paper_29314.pdf
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    References listed on IDEAS

    as
    1. Andrea Prat, 2005. "The Wrong Kind of Transparency," American Economic Review, American Economic Association, vol. 95(3), pages 862-877, June.
    2. Laeven, Luc & Majnoni, Giovanni, 2003. "Loan loss provisioning and economic slowdowns: too much, too late?," Journal of Financial Intermediation, Elsevier, vol. 12(2), pages 178-197, April.
    3. Rolf H. Weber, 2010. "Multilayered Governance in International Financial Regulation and Supervision," Journal of International Economic Law, Oxford University Press, vol. 13(3), pages 683-704, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    stability; liquidity risks; systemic risks; pro cyclicality; fair values; information; certainty; regulation; central banks; accountability; macro prudential regulation;

    JEL classification:

    • K2 - Law and Economics - - Regulation and Business Law
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G01 - Financial Economics - - General - - - Financial Crises

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