A Survey of Research on Fair Value Accounting for Financial Institutions*

Even though fair value accounting (FVA) enjoys widespread support from standard setters around the world, the practice of marking assets and liabilities to market remains controversial. While FVA affects all firms to a certain extent, financial institutions are most affected due to the nature of the assets that they hold. In this paper, we first discuss fair value measurement and its application before exploring the consequences of FVA, including its impact on regulatory capital. We then discuss key benefits and challenges of FVA. Standard setters believe that FVA provides the most relevant information to financial statement users; however, the increased relevance comes with a cost of reduced reliability due to the estimation involved. More recently, concerns have been raised about FVA leading to procyclicality and contagion that can cause or exacerbate boom and bust cycles. After summarizing the literature, we identify opportunities for additional research.