Shooting the messenger
The fair value concept only communicated the consequence of poor decisions in reporting entities such as the case of subprime loans. Fair value was only making known the disastrous investment decisions although some regulators and governments choose to believe that the numbers were wrong. For example, the US government voted approximately $ 200 billion to sustain AIG in March 2009. Such actions give insight into the quality of evaluations made by management regarding investments. (Paul et al, 2009) Blaming fair value for the financial crisis rather than the investment decisions made by financial institutions, therefore, amounts to shooting the messenger.
The bank is forced to shrink its balance sheet to maintain the leverage ratio. The bank has to sell assets to achieve its objective that influences other banks to act in the same manner. The selling pressure forces banks to aggressively mark down the value of assets in the books. This sparks contagion and eventually a severe downturn. Thus, the financial crisis demonstrated a key advantage of FVA by showing its ability to provide prompt updates on the financial conditions of financial firms.
Reference
Adrian, T. & Shin, H.S. 2010, ‘Liquidity and leverage,’ Journal of Financial Intermediation, 19(3), pp. 418-437
Paul A., Anne C., Wolfgang D., Chrystelle R., & Peter W., 2009, ‘FAV and the banking crisis: Shooting the messenger,’ Accounting in Europe, 6:1, 3-24.
Sherry Roberts is the author of this paper. A senior editor at MeldaResearch.Com in pay someone to write my research paper services. If you need a similar paper you can place your order from write my research paper online services.
The bank is forced to shrink its balance sheet to maintain the leverage ratio. The bank has to sell assets to achieve its objective that influences other banks to act in the same manner. The selling pressure forces banks to aggressively mark down the value of assets in the books. This sparks contagion and eventually a severe downturn. Thus, the financial crisis demonstrated a key advantage of FVA by showing its ability to provide prompt updates on the financial conditions of financial firms.
Reference
Adrian, T. & Shin, H.S. 2010, ‘Liquidity and leverage,’ Journal of Financial Intermediation, 19(3), pp. 418-437
Paul A., Anne C., Wolfgang D., Chrystelle R., & Peter W., 2009, ‘FAV and the banking crisis: Shooting the messenger,’ Accounting in Europe, 6:1, 3-24.
Sherry Roberts is the author of this paper. A senior editor at MeldaResearch.Com in pay someone to write my research paper services. If you need a similar paper you can place your order from write my research paper online services.
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