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http://ssrn.com/abstract=1366168
 
 

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Procyclicality and Fair Value Accounting


Juan A. Sole


International Monetary Fund (IMF)

Alicia Novoa


International Monetary Fund (IMF)

Jodi Scarlata


International Monetary Fund (IMF)

March 2009

IMF Working Paper No. 09/39

Abstract:     
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.

Number of Pages in PDF File: 42

Keywords: Procyclicality, fair value accounting, bank capital

JEL Classification: M41, M44, M45, E32

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Date posted: March 23, 2009  

Suggested Citation

Sole, Juan A. and Novoa, Alicia and Scarlata, Jodi, Procyclicality and Fair Value Accounting (March 2009). IMF Working Papers, Vol. , pp. 1-40, 2009. Available at SSRN: http://ssrn.com/abstract=1366168

Contact Information

Juan A. Sole (Contact Author)
International Monetary Fund (IMF) ( email )
700 19th Street, N.W.
Washington, DC 20431
United States
Alicia Novoa
International Monetary Fund (IMF) ( email )
700 19th Street, N.W.
Washington, DC 20431
United States
Jodi Scarlata
International Monetary Fund (IMF) ( email )
700 19th Street, N.W.
Washington, DC 20431
United States
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