FAIR VALUE ACCOUNTING AND ITS IMPACT ON BANKING SECTOR STABILITY

  • Petr Hájek Unicorn College, Prague and Central Bohemia University
  • Gaukhar Alimbekova Al-Farabi Kazakh National University
  • Adilya Baydildina Al-Farabi Kazakh National University
  • Nurbek Adambekov Turar Ryskulov New Economic University
  • Kholnazar Amonov Central Bohemia University
Keywords: SFAS 157, SFAS 159, Mark to Market rule, Banking crisis, Fair Value Accounting

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

Published
2015-12-30
Section
Articles