Fair Value Accounting Practices and Efficiency of Banks: A Theoretical Perspective

Accounting and Finance Research Vol. 7, No. 4; 2018, 66-

Accounting and Finance Research Vol. 7, No. 4; 2018, pp. 66-77

12 Pages Posted: 10 Oct 2019

See all articles by Sisira Jayasekara

Sisira Jayasekara

Central Bank of Sri Lanka

Wasantha Perera

University of Sri Jayewardenepura

Roshan Ajward

University of Sri Jayewardenepura

Date Written: 2018

Abstract

This conceptual paper discusses the impact of fair value accounting practices on performance of commercial banks in relation to the established banking theories i.e. Credit creation, fractional reserve and financial intermediation theory. These theories are discussed in view of historical cost accounting principles and fair valued accounting principles considering the performance in terms of efficiency during different stages of economic conditions. The analysis shows that fair value accounting practices in banks create reserves in economic booms improving efficiency and deteriorate created reserves in economic downturns causing financial crises. Enhanced financial performance in terms of unrealized gains improves the overall efficiency of banks in view of the intermediation approach of the financial intermediation theory. Therefore, it can be interpreted that external factors such as accounting, infrastructure, and technology can influence efficiency of the financial intermediation process. This is the first study to discuss the implications of fair value accounting on banking theory in view of performance of banks and stability of financial system.

Suggested Citation

Jayasekara, Sisira and Perera, Wasantha and Ajward, Roshan, Fair Value Accounting Practices and Efficiency of Banks: A Theoretical Perspective (2018). Accounting and Finance Research Vol. 7, No. 4; 2018, 66-, Accounting and Finance Research Vol. 7, No. 4; 2018, pp. 66-77, Available at SSRN: https://ssrn.com/abstract=3461310 or http://dx.doi.org/10.2139/ssrn.3461310

Sisira Jayasekara (Contact Author)

Central Bank of Sri Lanka ( email )

30, Janadhipathi Mw.
Janadipathi Mawatha
Colombo 01, 00100
Sri Lanka

Wasantha Perera

University of Sri Jayewardenepura ( email )

Nugegoda
Gandodawila
Gangodawila, Nugegoda 10250
Sri Lanka

Roshan Ajward

University of Sri Jayewardenepura ( email )

Nugegoda
Gandodawila
Gangodawila, Nugegoda 10250
Sri Lanka
0714837303 (Phone)
10250 (Fax)

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