Thinking of Applied Fair Value under Financial Crisis
|School||Dongbei University of Finance|
|Keywords||Fair value financial crisis dynamic provisioning|
As the financial market grew rapidly and lots of financial innovations appeared, Fair Value, as the measurement attribute of the financial tools, was first proposed in 1990. Fair Value is the amount of the asset swap and the debt settlement in a fair transaction, in which the two sides are both familiar with the situation and willing to carry out the transaction. Gradually, Fair Value draws attention and becomes internationally popular, because of its distinguishing features such as information reliability, high relativity of decision-making, e.g. Because Fair Value can provide the user of the financial report with meaningful information to prevent and defuse the financial risks, and it is regarded as the most effective measurement attribute of the financial tools. Although it has some demerits in some aspects, Fair Value is becoming more and more widely used in the world because of its distinguished practicability.In 2008, the global financial crisis broke out, in which the role that Fair Value played was widely debated. The opponents think that the stipulate of Fair Value Measurements made too much of the assets of financial institutions by market value writing-down. This could make the market deep into a vicious circle: transaction prices down, then asset write-downs, then panic selling and then transaction prices further down, which finally made financial crisis even more serious. So then call for repealing or suspending of this guideline. However, the supporters think that Fair Value Accounting has nothing to do with this financial crisis. They think that Fair Value played a positive role in this financial crisis. Using the Fair Value model, the accounting profession exposes the financial asset bubble timely, transparent and open manner, making financial sector, investors and financial regulatory authorities face and defuse financial risks. At the same time, the investors could comprehend the scale and dynamics of crisis more timely and efficient.In this paper, by briefly reviewing the happening, the developing and the global outbreak of the financial crisis, we analyze the cause of the happening and the spread of the financial crisis. And we find that the root cause of this financial crisis is not Fair Value but the inadequate supervision by regulatory bodies, unregulated financial derivatives product innovation, insufficient awareness of risk prevention and management mechanism of Regulators, financial institutions and credit rating agencies. However, due to the demerit of the evaluation model and the procyclical effects of Fair Value, in condition of market price dropping and lack of market functions, the loss under unreasonable market value write-down is much larger than the actual loss, which magnified the loss of the financial crisis, and deepened and aggravated the spread of the crisis. More than that, in finite and rational financial markets, Fair Value can also aggravate the economical fluctuation, raise the system risks and affect the financial stability.Even so, compared with other measurement attribute, Fair Value is still the most effective one. The outbreak of the financial crisis is a test of it. There are still some problems in the using of Fair Value, which need to be further modified and perfected. By using the dynamic reserve system of Spain for reference, we propose a new method to optimize Fair Value. This paper uses data to simulate the counting and drawing of the dynamic reserve system, and gets the conclusion that the counting and drawing of the dynamic reserve system has obvious counter-cyclical effect and can flatten periodic fluctuation of the economy. Compared with Fair Value, dynamic reserve system can efficiently defuse the shock from the periodic effect to the financial system. It can also raise the openness of the information; enhance the financial stability and the ability for managing the risks of the financial institutions.