IMF calls for fair value review

The International Monetary Fund has suggested that fair value accounting
rules be reviewed, on the back of a report which highlights how the practice
exacerbated the asset prices.

The global fund is the latest senior organisation calling for a change in the
rules, as investment banks, accounting advisory bodies and senior executives
criticised the standard in recent weeks.

The IMF predicts that the credit crunch could result in losses of as much as
$1trillion (£50bn).

In its latest Global Financial Stability Report from the IMF, states notes
that the experience of the last few months, during which the markets plunged
with several lenders writing off billions, the application of the fair value
accounting framework caused prices to fall further in the face of thresholds
that required sales of assets when fair-values fall below the threshold.

‘We have been a little bit humbled by the analysis of the crisis because it
has been a very, very complex crisis,’ IMF director of the monetary and capital
markets department, Jaime Caruana said.

The report also showed that lenders failed to address risks associated with
the structured investment vehicles and commercial paper conduits, held off their
balance sheet. This was in turn ‘in-transparent to investors and regulators’,
the report said.

‘First, the balance sheets of financial institutions are weakening; second,
the de-leveraging process continues and also that asset prices continue to fall;
and, finally, the macroeconomic environment is more challenging because of the
weakening global growth,’ Caruana added.

Further reading:

blames $1trn credit crisis on lax financial rigour

the IMF report here

Credit crunch sparks fair value revolt

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