Procyclicality and Fair Value Accounting

Procyclicality and Fair Value Accounting

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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.are valued at a historical cost that does not represent the current market conditions, an accurate picture of a banka#39;s equity ... Smoothing techniques and circuit breakers on reporting prices Simulations using proposed alternatives to smoothanbsp;...

Title:Procyclicality and Fair Value Accounting
Author: Jodi G. Scarlata, Mr. Juan Sole, Alicia Novoa
Publisher:International Monetary Fund - 2009-03-01

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