Fair Value Accounting and Procyclicality: Mitigating Regulatory and Accounting Policy Differences through Regulatory Structure Reforms and Enforced Self Regulation.
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In what ways can changes to the structure of regulation (as well as other regulatory reforms)
mitigate the effects of policies which trigger financial instability? More specifically policies,
information asymmetries or externalities which could give rise to bank contagion,
systemic/liquidity risks or procyclical effects?
Whilst acknowledging that accounting standards play a fundamental role in addressing problems
which could contribute to information asymmetries and ultimately systemic risks, this paper also
highlights why the type of regulatory structure, clear allocation of responsibilities between
regulators, as well as measures aimed at fostering accountability, constitute vital elements which
could serve as safeguards in mitigating procyclical effects (as well as other factors) which could
trigger financial instability. In achieving this aim, the paper focusses on the rationale for fair value
accounting, as well as problematic issues arising from its implementation.
The adoption of international accounting standards is considered to have a vital role in contributing
to financial stability. This paper will also illustrate how the implementation of accounting standards
and policies, in certain instances, have contrasted with Basel Committee initiatives aimed at
mitigating procyclicality and facilitating forward looking provisioning. More importantly, the paper
will highlight how and why differences between regulatory and accounting policies could (and
should) be mitigated.
Keywords
HG Finance