Benefits Of Fair Value Accounting
Fair value became a significant topic during the financial crisis in the U.S. in 2008. People started penetrating for responses for the reason behind something so horrible that could happen and desired something to put responsibility on. For some, fair value accounting was to be responsible but like all debated topics, there were others on the other side of the topic disagreeing in favor of fair value accounting. Opponents of fair value accounting include the American Bankers Association (ABA), the Independent Community Bankers Association (ICBA), as well as Steve Forbes (editor-in-chief of business magazine Forbes as well as president and chief executive officer of its publisher, Forbes Inc.), Blackstop Group Chairman Stephen Schwarzman, Former …show more content…
There are basically two arguments why fair value accounting can donate to pro-cyclicality. The first argument is that fair value accounting and asset write-ups allow banks to raise their leverage during economic expansions, which in turn makes the financial system more vulnerable and financial crises more severe. The second argument is that fair value accounting can cause corruption in financial markets. The idea is that ―banks may or have to sell assets at a price lower than the major value and that the price from these forced sales becomes applicable to other institutions that are required by fair value to mark their assets to market. Fundamental value differs from fair value in the following …show more content…
In one of the studies done by The American Enterprise Institute for Public Policy Research (AIE), the researcher Peter Wallison stated, ―fair value, as applied by accountants in the current credit crunch, has been the principal cause of an unprecedented decline in asset values and an unprecedented rise in instability among financial institutions. The system has to be rethought, not only because of its contribution to financial instability but also because its pro-cyclicality tends to create asset bubbles and exacerbate the effects of their collapse. This is additional example of how much debate that fair value has contributed to a decline in the value of assets and the variability of financial institutions eventually leading to their failure. According to an article in The Wall Street Journal, ―banks generally loathe mark-to-market rules, which rely on what they feel are too often irrational market prices. The market value did fall excessively in the depths of the crisis. And many bankers, and bank regulators, believe the rules worsened the financial
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