Dissertation > Economic > Fiscal, monetary > Finance, banking > World of finance, banking

The financial prudential supervision from the Perspective of fair value accounting

Author WangShouHai
Tutor LiuYuTing
School Institute of Fiscal Science
Course Accounting
Keywords Fair value Procyclicality Prudential supervision Expected loss Information Framework
CLC F831
Type PhD thesis
Year 2011
Downloads 1000
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August 2007 began in the U.S. subprime mortgage crisis triggered a once-in-a-century financial crisis. Fair value accounting pro-cyclical effects of the financial crisis controversial, different stakeholders around the issue of fair value accounting in a fierce game. To the financial sector and prudent regulatory authorities as the representative of the opposition that fair value accounting is pro-cyclical effect, the culprit of the financial crisis. Investors and the securities regulatory authorities, represented by supporters believe that fair value accounting to enhance the transparency of information to help investors understand the financial position of the financial institutions in a timely manner, and enhance the flexibility of the financial system to help restore financial stability fair value accounting is a risk of \Thus, the debate between the two sides mainly focused on fair value accounting is pro-cyclical effects, and whether it might be an adverse impact on financial stability. Unprecedented debate, not only related to the future and destiny of the fair value accounting, but also relevant to prudential supervision direction of reform. To use the G20, the Financial Stability Board, the Advisory Group of the financial crisis as the representative of the intervention of the political forces, both of setting accounting standards caused by the pressure, but also provide the impetus for reform of fair value accounting. After the financial crisis, to keep accounting standard-setting relative independence, how to both improve and perfect Accounting Standards (inactive market conditions measured at fair value, impairment of financial assets, as well as information disclosure guidelines) and coordination the difference between the accounting and prudential supervision, is currently facing a major issue. It is based on this historical background, we object to the financial industry by the number of analysis and empirical analysis of the fair value accounting pro-cyclical effect, and the perspective of information disclosure to provide help in solving problems. Although the root cause of the financial crisis due to the economic structural imbalances, financial innovation transition, financial institutions due to the absence of lax risk management and financial supervision, accounting itself has a strong economic consequences (Zeff, 1978; Scott, 2000 ), during the financial crisis, fair value accounting pro-cyclical effect to the financial stability adversely affected. This paper argues that the normal circumstances, the fair value accounting reform to enhance the transparency of accounting information, the transparency of the Company's empowerment compressive strength of financial institutions. However, with the deepening of the financial crisis, the fair value of the risks and measurement error is increasing uncertainty about the future, compared with the previous behavior of financial institutions will be more pro-cyclical effect. Maintain financial stability is an important duty of the prudential regulators, accounting for the prudential supervision of financial stability decision to provide basic information. Accounting information financial institutions' internal risk measurement, an important foundation for capital regulation and solvency analysis, help to alleviate the risk of financial market information asymmetry, as well as evaluating the financial system, promote the evolution process of the development of the financial market as well as to enhance the financial the efficiency of the globalization of markets. One of the best way to contain the financial crisis is to market participants (investors, accounting standards formulated by prudential supervision, securities regulators, etc.) to provide accurate, complete and truthful information to speed up the process of price adjustment, so as to enhance the transparency of market information. Therefore, we adhere to the principles of fair value accounting, From a prudential perspective, the establishment of an ideal framework. Information users through the framework, not only from the micro-level enterprise financial position, operating results and cash flows, risk profile, and measurement error, but also from the macro level of risk, the risk of infection may and systemic risk information. In order to mitigate the adverse effects of the pro-cyclical effect on the financial stability, prudential regulators and accounting standard setters from a different perspective on the proposed solution, but different goals, interests, respond to Procyclicality strategy, there is a big difference between even in conflicts. Only coordination and cooperation between accounting and prudential supervision, in order to tackling the problem, both from the institutional arrangements to establish long-term mechanism for maintaining financial stability, but also to ensure that the accounting standard setters relatively independent, minimize the pro-cyclical effect the adverse consequences. Although clear separation between accounting and prudential supervision, but they are the ultimate goal of protecting all types of investors and the public interest, and to enhance the quality and transparency of information and guide rational allocation of resources. Therefore, to enhance coordination and communication between the fair value accounting and prudential supervision, to narrow the differences between them, so that the same source of information required to meet a variety of regulatory objectives, reducing the banks to comply with the cost and enhance the transparency of information. The ideal framework established from this article we can see, the fair value of the information is the core of the ideal framework for fair value estimates involves not only the estimated value of assets and liabilities, but also involved in the risk profile of estimation and measurement error. Therefore, the post-crisis period, to strengthen the study of fair value is no active market conditions, will help pass real information to market participants and enhance the flexibility of the financial system to external shocks. The intensity of risk measurement techniques introduced in the fair value estimates is not enough, especially on the second level and third level fair value estimated to fully absorb the practical experience in risk management, in order to provide the correct information for the users of information. Accounting information has the properties of public goods, tend to lack of supply, fair value accounting and prudential supervision in the mandatory disclosure of risk information should also be greater coordination, communication and coordination between them, both to reduce the information overload, but also improve the information transparency. In addition, financial institutions are the financial statements prepared in accordance with accounting standards and the preparation of regulatory reporting in accordance with prudent regulatory rules, both of which are in many respects differences, therefore, to strengthen the financial instruments accounting classification and careful classification and accounting impairment of assets prudent expected loss of the estimated coordination between, to narrow the differences between the two as well as open up the links between them, not only help enhance the accounting standards of operability and transparency of information, but also conducive to the stability of the financial markets. Paper suggests good practices adhere to the premise of the basic principles of fair value accounting, prudential supervision of risk management in coordination with the fair value measurement and liquidity risk, credit risk evaluation and calculation of liquidity valuation adjustments and credit valuation adjustments to establish a unified framework to provide specific guidance on fair value measurement is no active market conditions; strengthen financial instruments classified meticulous management, strengthen the accounting classification, cautious classification and liaison mechanism between the regulatory capital management; learn from the prudential supervision of the expected loss estimates, such as breach of contract probability, loss given default, exposure estimates applied accounting impairment of assets; absorption prudential supervision of risk management to enhance the accounting risk information as well as the measurement error information in the grouping of financial instruments, back testing and stress testing experience, the level of disclosure. These areas can reduce the accounting standards and the Basel II compliance costs, reduce the difference between the accounting and prudential supervision, improve the transparency of information, and to promote the stability of financial markets. In order to enable enterprises to the same source of information to meet the different regulatory objectives, entities need strong integration of accounting data, business data and market data, different risk measurement models used by the various departments and the risk assessment process, as well as risk management department and management accounting department , the establishment of a comprehensive data platform, unified risk measurement methods and risk assessment processes, the formation of a set of logic clear, consistent risk reporting system. Not only reduces the financial institutions compliance costs and enhance information transparency. Throughout, the use of normative analysis, empirical analysis, case analysis method for prudential supervision of fair value accounting perspective the main line, from the the information disclosed perspective to analyze the problem, solve the problem, to obtain the desired results.

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