Procyclicality and Fair Value Accounting

Jodi Scarlata, Juan Sole and Alicia Novoa

No 2009/039, IMF Working Papers from International Monetary Fund

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.

Keywords: WP; business cycle; fair value; bank balance; balance sheet volatility; FV balance sheet; Procyclicality; fair value accounting; bank capital; historical cost; yield curve; active market; funding condition; risk profile; stock market index; capital position; equity capital; banks' balance sheets; Financial statements; Business cycles; Securities; Loans (search for similar items in EconPapers)
Pages: 42
Date: 2009-03-01
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Citations: View citations in EconPapers (14)

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