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Financial Instruments, Financial Reporting, and Financial Stability

35 Pages Posted: 26 Jan 2012 Last revised: 30 Mar 2012

Christian Laux

Vienna University of Economics and Business

Date Written: February 22, 2012

Abstract

I review new empirical evidence from the recent financial crisis on the relation between financial reporting and financial stability. I draw the following conclusions: First, there is still no evidence that fair value accounting caused widespread fire sales of asset or contagion. Second, the empirical evidence suggests that accounting and regulation might have contributed to the crisis by allowing several banks to delay actions. Third, even if share prices reacted positively to the relaxation of fair value accounting rules during the crisis, the origin of the problem might be lax rules that allowed banks to run into financial and regulatory problems. Fourth, fair values can be relevant for assets that a bank intends to hold until maturity if that bank strongly relies on short-term financing. Fifth, the recognition of fair values is no substitute for information that allows investors to judge a bank’s risk exposure and the validity of reported fair values.

Keywords: Mark-to-market, fair-value accounting, procyclicality, financial regulation, financial crisis, financial institutions, banks

JEL Classification: G21, G28, M41

Suggested Citation

Laux, Christian, Financial Instruments, Financial Reporting, and Financial Stability (February 22, 2012). Available at SSRN: https://ssrn.com/abstract=1991825 or http://dx.doi.org/10.2139/ssrn.1991825

Christian Laux (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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