Marking to Market, Liquidity, and Financial StabilityInstitute for Monetary and Economic Studies, Bank of Japan, 2005 - Accounting and price fluctuations - 32 pages This paper explores the financial stability implications of mark-to-market accounting, in particular its tendency to amplify financial cycles and the "reach for yield". Market prices play a dual role. Not only do they serve as a signal of the underlying fundamentals and the actions taken by market participants, they also serve a certification role and thereby influence these actions. When actions affect prices, and prices affect actions, the loop thus created can generate amplified responses - both in creating bubble-like booms in asset prices, and also in magnifying distress episodes in downturns. |
Common terms and phrases
accounting regime affect actions amplified response asset prices assets and liabilities assets are marked balance sheet Bank of England bond Duration bond price bonds issued capital requirement cash collateralisation comparative statics credit deriv credit quality credit risk demand for bonds Discussion Paper Series duration of pension economic effect of looser endogenous responses equity fair value accounting fall in property financial institutions financial inter financial intermediaries financial markets framework function Furfine hedge funds historical cost regime holding of bonds holding of property impact increase in property increased demand initial shock interest rates liabilities by holding liabilities to market liability stream liquid looser monetary policy LTCM mark-to-market accounting mark-to-market regime mark-to-market rules marked-to-market value market participants market value marking to market match the duration mediaries mortgage claims pension funds price of bonds price of property property price property sector ratio Resilience test sale of property search for yield systemic risk