35 Pages Posted: 26 Jan 2012 Last revised: 30 Mar 2012
Date Written: February 22, 2012
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: 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