ABSTRACT
Part of the impetus for fair value accounting – at least in banking – came from the experience of the US Savings and Loan Crisis (S&LC) in the 1980s through the early 1990s. Although the liabilities of the Savings and Loans institutions in aggregate exceeded their assets by as much as $100 billion on a fair value basis – leaving most institutions insolvent – their historic cost balance sheets disguised this deficit. In addition, rising interest rates caused average funding rates of the S&Ls to surpass the average return on their loan books, while under historic cost accounting the mounting losses were only recognized gradually in income (Enria et al. 2004). The historic cost accounting regime was blamed for concealing inefficiencies in the Savings and Loans institutions, and for contributing to the length and severity of the crisis, with detriment to stakeholders and taxpayers (Kane 1987, 1989; Michael 2004). Similarly, in the banking crisis in Japan in the mid-to-late 1990s, delayed loan loss provisioning and write-offs under the then prevailing historical cost regime was suggested to have contributed to the prolonged crisis, which – as was argued – would have resolved earlier under fair value accounting.
