FAIR VALUE ACCOUNTING AND ITS IMPACT ON BANKING SECTOR STABILITY
Abstract
In 2007 two rules SFAS 157 and SFAS 159 were adopted into fair value accounting scheme just into looming financial crisis. These rules had high pro-cyclical effect and significantly affected banking sector stability during the recession and its “profitability” during the years after the recession. Important parts of these rules were relaxed in April 2009 and then some other suspended in January 2016. First, FASB let the companies to use whatever valuation methods to value balance sheet securities in terms of fair value accounting they considered best within the SFAS 157 framework. Second, FASB scraped Debt Value Adjustments, part of SFAS 159, from income statements watched most by investors. This article reviews the implications of mark to market rules, its pro-cyclicality and impact on banks’ balance sheets.References
Bach, G. L. (1949). Bank Supervision, Monetary Policy, and Governmental Reorganization. Journal of Finance, pp. 269-285.
Bloomberg. (6. January 2016). Accounting Rule That Made Weak Banks Look Healthier Ended. Retrieved from BloombergBusiness: http://www.bloomberg.com/news/articles/2016-01-06/accounting-rule-that-made-weaker-banks-look-healthier-eliminated
Congressional Budget Office. (1991, June). CBO Staff Memorandum: The Cost of Forbearance During the Thrift Crisis. Washington, DC: June.
Debevoise & Plimton LLP. (April 17, 2009). FASB issues guidance on fair value determination in illiquid or inactive markets. D&P Client Update, https://tinyurl.com/hc9mwj6. Retrieved from https://tinyurl.com/hc9mwj6
Dow Jones Business News. (5. January 2016). Rule on Valuation of Banks' Liabilities to Be Scrapped. Retrieved from nasdaq.com: http://www.nasdaq.com/article/rule-on-valuation-of-banks-liabilities-to-be-scrapped-20160105-00841
Gilbert, A. R. (1992, July/August). The Effects of Legislating Prompt Corrective Action on the Bank Insurance Fund. Federal Reserve Bank of St. Louis.
Hájek, P., Maitah, M., & Čadil, J. (2015). Destabilizing Effects of Fair Value Accounting During US Banking Crisis. Review of European studies. doi:10.5539/res.v7n11p222
Jacobs, D. P. (1964). The Impact of Examination Practices Upon Commercial Bank Lending Policies. Washington D.C.: U.S. Government Printing Office.
Jones, H. (1940). An Appraisal of the Rules and Procedures of Bank Supervision, 1929-39. pp. 183-198.
MarketWatch. (28. Janaury 2016). Deutsche Bank reports 6.8 billion-euro loss. Retrieved from MarketWatch: http://www.marketwatch.com/story/deutsche-bank-reports-717-billion-loss-2016-01-28
Peterson, M. O. (1977, Autumn). Conflicts Between Monetary Policy and Bank Supervision. Issues in Bank Regulation, pp. 26-37.
Reuters. (15. January 2016). Citigroup, Wells Fargo gird for loan losses as oil price dives. Retrieved from Reuters: http://www.reuters.com/article/us-usa-banks-results-idUSKCN0UT2FU
SEC. (30. December 2008). Congressionally-Mandated Study Says Improve, Do Not Suspend, Fair Value Accounting Standards. Retrieved from U.S. Securities and Exchange Commission: https://www.sec.gov/news/press/2008/2008-307.htm
Simonson, D. G., & Hempel, G. H. (1993). Banking Lessons from the Past: The 1938 Regulatory Agreement Interpreted. Journal of Financial Services Research, pp. 249-267.
The Hunt Commission Report. (1971). Report of the President's Commision on Financial Structure and Regulation.
U.S. Congress. (1974). Financial System Reform: Key to a Stable, Growing Economy. Staff Report, 93rd Congress, 2nd Session.
Viner, J. (1939). Recent Legislation and the Banking Situation. American Economic Association, pp. 109-110.
Wikinvest. (2016). Debt Valuation Adjustment. Retrieved from Wikinvest: http://www.wikinvest.com/wiki/Debt_Valuation_Adjustment
Zero Hedge. (22. April 2009). The Law Of Unintended "Fair Value Option" Consequences. Retrieved from Zero Hedge: http://zerohedge.blogspot.cz/2009/04/law-of-unintended-fair-value-option.html
Copyright information
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License (Creative Commons Attribution License 3.0 - CC BY 3.0) that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).
