Mark-to-market accounting and liquidity pricing

Franklin Allen and Elena Carletti ()

Journal of Accounting and Economics, 2008, vol. 45, issue 2-3, 358-378

Abstract: When liquidity plays an important role as in financial crises, asset prices may reflect the amount of liquidity available rather than the asset's future earning power. Using market prices to assess financial institutions' solvency in such circumstances is not desirable. We show that a shock in the insurance sector can cause the current market value of banks' assets to fall below their liabilities so they are insolvent. In contrast, if values based on historic cost are used, banks can continue and meet all their future liabilities. We discuss the implications for the debate on mark-to-market versus historic cost accounting.

Date: 2008
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Working Paper: Mark-to-market accounting and liquidity pricing (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:45:y:2008:i:2-3:p:358-378

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