Research on the Pro-cyclical Effect of Fair Value Accounting
|Keywords||Fair value accounting Core capital Pro-cyclicality|
Fair value accounting received concern because of its pro-cyclical effects. This paperverify the transmission mechanism of its pro-cyclical effects, mainly includes the capitalregulation mechanism. Since2007-2008, the financial markets experienced a relatively largemarket volatility, so we use the data between this period to verify the pro-cyclical effects of fairvalue accounting. In order to verify the pro-cyclical effects of fair value accounting, we use thedata between2007-2008of the listed banks in China to analysis the effects of fair valueaccounting treatment to core capital and whether fair value accounting under crisis conditionslead to bank on fire selling behavior. After the analysis we found that:(1) The accountingtreatment of(including changes in the fair value of the asset and impairment loss) financial assetsfor held for trading, available-for-sale financial assets and held-maturity investments have littleeffect on core capital.(2) In the four categories of financial assets, loan impairment have thebiggest effect on core capital, but as we know, loan impairment charges are not measured at fairvalue, but rather depending on management’s estimates and judgments.(3) In crisis, fair valueaccounting did not lead to fire selling, The data show that most banks purchased theavailable-for-sale financial assets and held-maturity investments, and most of the bankexperienced positive investment income. Thus, we concluded that in China’s listed banks, fairvalue accounting did not conduction pro-cyclical effect through the capital regulatorymechanisms. Finally, we think that the objectives of accounting and banking supervision differ,the objective of financial reporting is to provide information that is useful to investors andcreditors and others, the objectives of banking supervision is to ensure the stability of thefinancial system, although the coordination of the two goals are very important, but we shouldknow that it is the responsibility of the bank regulators, not accounting standard setters, to ensurethe stability of the financial system.