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The Research on Loan Impairment Model Based on Fair Value Measurement

Author: CaoKun
Tutor: YiChuanHe
School: Hunan University
Course: Finance
Keywords: Fair value procyclicality incurred loss model expected loss model loan impairment
CLC: F830.5
Type: Master's thesis
Year: 2011
Downloads: 44
Quote: 0
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Abstract


The financial crisis which broken out in2008had brought great economicalimpact to many countries, led the lost of trillions of dollars, and made people all of theworld to thought the cause of it. Some experts flaunted fair value accounting as themain reason of the financial crisis, and did some research on its procyclicality, butsome others advocate fair value accounting. IASB thought it’s lacking of priorexpectations and treatment of risk caused the financial crisis, they propose to replacethe incurred loss by use expected loss model, to reduce loss by excepting risk. Loansis the most important asset of banks, more and more propose to measure loans by fairvalue accounting. How to collect fair value accounting and expected loss model is ofgreat importance to our banks.This article aims at combine fair value accounting and expected loss model, andanalyze their impact on loan impairment. First I will analyze the generationmechanism and the transmission mechanism of fair value’s procyclicality, thetheoretical basis for loan impairment and the inner collection of fair value and loan.Second, I will analyze the difference and respectively advantage and disadvantage ofincurred loss model and expected loss model in theory and in condition set. Latermodify expected loss model based on the goal of modification and the problem ofexpected loss model itself. Finally, this article will give some recommendations onhow to spread expected loss model.Through analysis, expected loss model can heal fluctuation to some extent, butits sensitivity on anticipation make it has a greater procyclicality compared withincurred loss model. the revised expected loss model has a greater advantage onhealing procyclicality and reducing sensitivity. Revised loss model can Effectivelydeal with the impact of changes in economic conditions, provide objective andreasonable accounting in financial market when volatility in macroeconomic time.Expected loss model can be promoted in China after further improvement as follows:improving policies laws and regulations on loan impairment, enhancing the information gathering and repayment anticipation, and increasing the depth andintensity of information disclosure, and separate disclosure on some important case.

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CLC: > Economic > Fiscal, monetary > Finance, banking > Finance, banking theory > Credit
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