Fair Value Accounting and Financial Stability

50 Pages Posted: 18 Nov 2005

See all articles by Andrea Enria

Andrea Enria

EBS

Lorenzo Cappiello

European Central Bank (ECB)

Frank Dierick

European Central Bank (ECB)

Sergio Grittini

European Central Bank (ECB)

Andrew Haralambous

European Central Bank (ECB)

Angela Maddaloni

European Central Bank (ECB)

Philippe A.M. Molitor

European Central Bank (ECB)

Fatima Pires

European Central Bank (ECB)

Paolo Poloni

European Central Bank (ECB)

Date Written: April 2004

Abstract

Accounting standard setters are considering the wider use of fair value accounting. This paper focuses on the financial stability implications of a move in the banking sector from the current accounting framework to full fair value accounting. A simulation exercise is performed on how various external shocks affect the balance sheet of an average European bank under the two frameworks. The paper further investigates the impact of the alternative framework on the main balance sheet items, and the interaction with banks' risk management, supervisory tools and statistical requirements. It also examines how the application of fair value accounting to banks' trading book has impacted their share price volatility. It is concluded that the introduction of full fair value accounting could have a significant effect in terms of income volatility, procyclicality of bank lending and more generally financial stability. Hence, any move towards this alternative accounting framework should be gradual.

Keywords: Accounting, banks, fair value, financial regulation, financial reporting, financial stability, risk management

JEL Classification: G14, G21, G28, M41

Suggested Citation

Enria, Andrea and Cappiello, Lorenzo and Dierick, Frank and Grittini, Sergio and Haralambous, Andrew and Maddaloni, Angela and Molitor, Philippe A.M. and Pires, Fatima and Poloni, Paolo, Fair Value Accounting and Financial Stability (April 2004). ECB Occasional Paper No. 13. Available at SSRN: https://ssrn.com/abstract=749044

Andrea Enria (Contact Author)

EBS ( email )

10 Paternoster Square
London EC4M 7DY
United Kingdom

Lorenzo Cappiello

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 8765 (Phone)

Frank Dierick

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Sergio Grittini

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Andrew Haralambous

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Angela Maddaloni

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Philippe A.M. Molitor

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Fatima Pires

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Paolo Poloni

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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