Mark-to-Market Accounting and Liquidity Pricing

By Franklin Allen, Elena Carletti. 2008

476 citations recorded by the source corpus.

When liquidity plays an important role as in times of financial crisis, asset prices in some markets may reflect the amount of liquidity available in the market rather than the future earning power of the asset. Mark-to-market accounting is not a desirable way to assess the solvency of a financial institution in such circumstances. We show that a shock in the insurance sector can cause the current value of banks' assets to be less than the current value of their liabilities so the banks are insolvent. In contrast, if historic cost accounting is used, banks are allowed to continue and can meet all their future liabilities. Mark-to-market accounting can thus lead to contagion where none would occur with historic cost accounting.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/6aef9f449f2247a14ec306bf1aaafd237e824ed2

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Citations in the corpus

Financial Accounting in the Banking Industry: A Review of the Empirical Literature (2014, unknown): “) Allen and Carletti (2013) on the other hand challenge the notion that deposit”
Market pricing of banks’ fair value assets reported under SFAS 157 since the 2008 financial crisis (2015, unknown): “Allen and Carletti (2008) show that prices reflect the cash available to buyers in imperfect markets with scarce liquidity.”
Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial Crisis (2009, background): “88 For theoretical treatments of the problem, see Allen and Carletti (2006, 2008), Allen and Gale (2006).”
The Role of Liquidity in Financial Crises (2008, background): “In Allen and Carletti (2008b) we suggest that in financial crisis situations where liquidity is scarce and prices are low as a result, market prices should be supplemented with both model-based and historic cost valuations.”
Illiquidity and All Its Friends (2011, background): “Allen and Carletti (2008b) suggest that when market prices and model based prices diverge significantly (more than 2% say), financial institutions should publish both.”
Interbank market liquidity and central bank intervention (2009, methodology): “Our analysis is based on a standard banking model developed in Allen and Gale (2004a, 2004b) and Allen and Carletti (2006, 2008).”
Fair Value Accounting for Financial Instruments: Does It Improve the Association Between Bank Leverage and Credit Risk? (2013, unknown): “On the other hand, theoretical papers by Allen and Carletti (2008) and Plantin et al.”
Accounting Discretion, Loan Loss Provisioning and Discipline of Banks' Risk-Taking (2012, unknown): “Plantin, Sapra and Shin (2007) and Allen and Carletti (2008) focus on potential negative effects of mark-to-market accounting on bank soundness.”
The fundamental principles of financial regulation (2009, background): “…facing a bank. where assets are not valued on a mark-to-market basis, they will have to be valued by a third party and we would also subscribe to Allen and Carletti (2008) proposal that each financial institution should publish two balance sheets: one based on mark-to-funding and another one…”
Incentives to Innovate and Financial Crises (2012, background): “This paper is related to the vast literature on financial crises (e.g. Allen and Carletti, 2006, 2008; Allen and Gale, 2000a, 2000b; and Boyd, Kwak and Smith, 2005), including papers that have shown theoretically that financial crises can be optimal.”
Market Pricing of Banks’ Fair Value Assets Reported under Sfas 157 During the 2008 Economic Crisis (2009, background): “…can be characterized as economic catastrophe bonds, but are overpriced by issuers because they offer far less compensation than alternatives with comparable payoff profiles.9 Coval et al. (2009) show how a slight imprecision in the parameters estimates to valuation models for the pricing of CDOs…”
Fire sales, indirect contagion and systemic stress testing (2017, unknown): “Previous studies Allen and Carletti (2008); Ellul et al. (2014) have focused on markto-market accounting as the channel of transmission of losses in fire-sales contagion. Allen and Carletti (2008) present arguments against the use of mark-to-market accounting for determining solvency during crisis p”
The crisis of fair-value accounting: Making sense of the recent debate (2009, background): “The basic idea is that banks may (have to) sell assets at a price below the fundamental value and that the price from these (forced) sales becomes relevant to other institutions that are required by FVA to mark their assets to market (Allen and Carletti, 2008; Plantin et al., 2008a). This argument r”
Does Mandatory IFRS Adoption Affect Crash Risk (2015, unknown): “13 Fair value accounting may also lead to increased crash risk through its effect on investor behavior during financial crises, such as feedback trading (Allen and Carletti, 2008; Plantin et al., 2008; Bhat et al., 2011 ).”
An Overview of the Crisis: Causes, Consequences, and Solutions (2010, unknown): “Allen and Carletti (2008b) suggest that when market prices and model based prices diverge significantly (more than 2% say), financial institutions should publish both.”