Financial stability, fair value accounting, and procyclicality

Juan Sole, Jodi Scarlata and Alicia Novoa
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Jodi Scarlata: IMF
Alicia Novoa: IMF

Journal of Financial Transformation, 2010, vol. 28, 61-75

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, forwardlooking 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: Financial Stability; Fair Value Accounting; Procyclicality (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofitr:1417

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