Advanced Financial Reporting and Regulation Essay - 1

Advanced Financial Reporting and Regulation - Essay Example The problem with this approach arises when the market for the asset becomes illiquid. This sets in the use of complex models that the company must come up with through the help of a specialist. These assets are grouped as Level three assets. During the financial crisis, there was a fall in the prices of mortgage and related securities. The result was illiquid markets for them and banks marked down their assets largely. This made banks have a great problem in meeting up their capital requirement. The critics claim that money could have helped solve the crisis that existed at that time. However, banks obtained cash through the sale of assets that further made a downward trend in the prices of assets. This led to an economic downturn and became a cycle. This is the main reason, critics of fair value accounting claim that it had a hand in the financial crisis that occurred. Most critics have distinguished mark- to-market accounting a mechanism through which fair accounting can contribute to the financial crisis. There is a link between bank regulation and fair value accounting when trying to evaluate how fair value accounting can lead to a crisis. Fair value depends on the market prices, which are not consistent and sometimes can deviate due to some reasons. The distorted prices can cause a bank to write down its assets to match the distorted prices. As a result, the regulatory capital of the bank would be depleted and it may force the bank to sell assets at lower prices. If the lower prices in the distressed bank become relevant to other banks, it can result to regulatory capital problems and write-downs even for sound banks (Laux and Leuz, 2009). Laux and Leuz (2009) found out that by the management paying attention to the company’s earnings might create the contagion problems. The management can sell their assets at relatively low prices that result to a contagion effect to the other banks. This makes other banks price their assets