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Empirical Research on the Procyclical Effect by Fair Value Accounting in China’s Listed Banks

Author: WangJunJie
Tutor: WangXiangYao
School: Zhejiang University of Finance
Course: Accounting
Keywords: Fair Value Procyclicality Financial Crisis Banking Industry
CLC: F830.42
Type: Master's thesis
Year: 2013
Downloads: 249
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The procyclicality exposed in2008U.S. financial crisis, pushed fair valueaccounting(FVA) to the cusp of entire accounting regulatory, made eliminating theprocyclicality lead the fair value(FV) accounting reform as well. It is with greattheoretical significance to research the procyclicality contained in the existingaccounting standards, when Chinese accounting standards is in processing inconvergence with IFRSs. Under this background, firstly we analysis the existingproblems with FVA and then sort out the transmission mechanism of its procyclicality,secondly we test the procyclical effect caused by FVA and information disclosure inChina’s banking system by analysis and test the empirical date from China’s listedbanks.We define the FVA’s procyclical effect as the process of the downward spiral ofasset prices, when combine the information disclosed by FAV with kinds of internalfactors of the banking system, which conducts as a non-linear “small impact, largefluctuation” process. Then we conduct the systematic analysis in a perspective ofinformation transmission, sort out the whole transmission mechanism of procyclicaleffect from FVA’s defects to the downward spiral. We regard FAV’s procyclicality asa category of comprehensive notion, which in reality is the FV’s departure of theasset’s value combines with the banking system’s other procyclical factors. In otherwords, the regulatory capital requirements, the risk management, the loanprovisioning system and the pay incentives are also procyclical. The result asdownward spiral in asset prices is complicated. In hence, we propose the view thatFVA’s procyclicality is less criticalIn the next part we use the stock-price-reaction model to test the empirical datefrom China’s listed banks during the event period from the year2008to2012tosupport our point. We find that the hierarchical information of FV and the FV ofnon-fair-value-measured financial instrument are not voluntarily disclosed by China’slisted banks and the Level2Inputs are the preferable after the preliminary analysis.Based on the elaborate analysis, we find that:(1) The trend of FV usagepercentage and the bank’s capital adequacy ratio is consistent with the globalizationprocess of the2008Financial Crisis spreading;(2) During the sample period, thesefinancial assets held-for-trading(HFT) and derivative are more volatile than held-to-maturity(HTM) and available-for-sale(AFS), and their impairment is alsomore obvious;(3) The banks with high proportion of financial assets preferderivatives more;(4) These derivative, HFT and AFS are mostly valued in level2orlevel3FV, and proportions are different in listed banks.After the empirical test, we find that:(1) The FVA’s procyclical effect is lesscritical;(2) The capital market recognize the reform direction of the FV standard inChina;(3) The extra FV information disclosure is not recognized by the investors.The last way to eliminate the procyclicality caused by FVA is acquiringcorporations to provide true, precise and integrated financial information, as we havealways believed that the disclosure of true and relevant accounting information is thebasic way to mitigate information asymmetry and also an important foundation of theprudential supervision. In hence, insisting on the FVA usage and after referring to theinternational FVA reform, we propose the followings:(1) systemic reform should betaken in financial instruments, impairment of assets and information Disclosure toradically solve the procyclicality problem;(2) From the accounting regulatoryperspective, it is necessary to insist and promote the adopting of FVA, enhance andformat the FVA disclosure;(3) The standard-setting board needs to maintain itsindependence at any time to realize the accounting objective and keep continuity;(4)FV should be raised to the level of the guiding philosophy, to address in the extrememarket.

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CLC: > Economic > Fiscal, monetary > Finance, banking > Finance, banking theory > Banking > Bank Accounting
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