Mark-to-market accounting and liquidity pricing

  • When liquidity plays an important role as in times of financial crisis, asset prices in some markets may reflect the amount of liquidity available in the market rather than the future earning power of the asset. Mark-to-market accounting is not a desirable way to assess the solvency of a financial institution in such circumstances. We show that a shock in the insurance sector can cause the current value of banks’ assets to be less than the current value of their liabilities so the banks are insolvent. In contrast, if historic cost accounting is used, banks are allowed to continue and can meet all their future liabilities. Mark-to-market accounting can thus lead to contagion where none would occur with historic cost accounting. Klassifizierung: G21, G22, M41

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Metadaten
Author:Franklin Allen, Elena CarlettiGND
URN:urn:nbn:de:hebis:30-30610
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2006,17
Series (Serial Number):CFS working paper series (2006, 17)
Document Type:Working Paper
Language:English
Year of Completion:2006
Year of first Publication:2006
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2006/08/25
Tag:Historical Cost; Incomplete Markets; Mark-to-market
Issue:July 20, 2006
Page Number:35
Source:CFS working paper ; 2006, 17
HeBIS-PPN:190344997
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht