Procyclicality and Fair Value Accounting

42 Pages Posted: 23 Mar 2009

See all articles by Juan A. Solé

Juan A. Solé

International Monetary Fund (IMF)

Alicia Novoa

International Monetary Fund (IMF)

Jodi Scarlata

International Monetary Fund (IMF)

Date Written: March 2009

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.

Keywords: Procyclicality, fair value accounting, bank capital

JEL Classification: M41, M44, M45, E32

Suggested Citation

Sole, Juan A. and Novoa, Alicia and Scarlata, Jodi, Procyclicality and Fair Value Accounting (March 2009). IMF Working Paper No. 09/39, Available at SSRN: https://ssrn.com/abstract=1366168

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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