Details

Subject(s)

• Fair value—Accounting [Browse]

Sponsoring body

• RAND Center for Corporate Ethics and Governance [Browse]

Author

• Helland, Eric [Browse]
• Clancy, Noreen [Browse]
• Dertouzos, James N., 1950- [Browse]

Summary note

Fair value accounting (FVA) refers to the practice of updating the valuation of assets or securities on a regular basis, ideally by reference to current prices for similar assets or securities established in the context of a liquid market; historical cost accounting (HCA) instead records the value of an asset as the price at which it was originally purchased. In the wake of the 2008 financial crisis, conflicting arguments have been made about the contributions of valuation approaches in triggering the crisis. This report investigates and clarifies the relationship between these two accounting approaches and risks to the financial system. The authors examine the risk implications of FVA and HCA in the various situations in which each is used; assess the role that these accounting approaches have played historically in financial crises, including the 2008 financial crisis, the savings and loan crisis of the 1980s, and the less developed country debt crisis of the 1970s; and explore insights about systemic risk that can be gleaned from better understanding the accounting approaches. The authors find that FVA was probably not a primary driver of the 2008 crisis. Moreover, they suggest that neither FVA nor HCA is objectively ⁰[MARC+62][MARC+65][MARC+74][MARC+74][MARC+65][MARC+72]⁰|(B+ than the other. Instead, both accounting approaches can provide useful information for different contexts when applied rigorously, but when they are implemented poorly or when regulatory oversight is weak, both FVA and HCA can produce misleading information that can increase systemic risk across the financial sector. The authors conclude with a series of recommendations for how FVA and HCA, and the financial information that both methods generate, can be improved to better protect against systemic risk to the banking sector in the future.

Notes

• "RAND Center for Corporate Ethics and Governance"
• "RR-370-CCEG"--Page [4] of cover.

Bibliographic references

Includes bibliographical references (pages 81-86).

Contents

• Introduction
• Background: The Debate over FVA and HCA
• Systemic Risk and Accounting Approaches
• Accounting Standards and Prudential Regulation
• Lessons from Historical Episodes Involving Accounting Standards, Systemic Risk, and Financial Crisis
• Implementation and Risk: The Challenges to Doing FVA and HCA Well
• Conclusion and Policy Options
• Appendix: An Overview of HCA and FVA.

Show 5 more Contents items

ISBN

• 0833082124
• 9780833082121

Tech. report no.

RAND/RR-370-CCEG

LCCN

2013950607

OCLC

858601791

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