Tuesday, October 7, 2008

More on Fair Value Accounting

In light of the uncertainties about valuation highlighted by the 2007–08 market turbulence, this chapter provides an empirical examination of the potential procyclicality that fair value accounting (FVA) methods could introduce in bank balance sheets. The chapter finds that, while weaknesses in the FVA methodology may introduce unintended volatility and procyclicality, thus requiring some enhancements, it is still the preferred accounting framework for financial institutions. It concludes that capital buffers, forward-looking provisioning, and more refined disclosures can help to mitigate the procyclicality of FVA. The analysis presented does not preclude that there are other dimensions to FVA that are relevant and that, after further scrutiny, may indicate the need for additional refinements to the FVA methodology. 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.

-Fair Value Accounting and Procyclicality, Global Financial Stability Report

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