Reinventing Financial Regulation: A Blueprint for Overcoming Systemic Risk

CHAPTER 8

How Accounting, Credit, and Risk Standards Create Risk

And What To Do About It

Financial practitioners and regulators largely agree that the Global Financial Crisis (GFC), and other recent crises, was compounded by the use of International Financial Reporting Standards. These standards emphasize marking the value of assets to their current market price. The accountant shorthand for this practice is “mark-to-market.”¹ The application of IFRS’s standard that governs the loan-loss provisions for financial institutions and extends mark-to-market² meant that when asset prices fell sharply in 2007 and 2008, financial institutions were forced to raise capital to set against the deterioration in their asset/liability ratio. To raise cash quickly ...