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The Banque de France issued its 12th issues Financial Stability Review concentrating on issues raised by valuation with respect to financial stability.
In many respects, the current crisis is about valuation, Christian Noyer, Governor of the Banque de France says noting that the crisis has revived a complex discussion on how financial instruments should be reported under accounting standards
“What is particularly striking is that uncertainty about the true value of complex financial instruments undermined global markets’ confidence, raised uncertainty about counterparties’ risk positions, and lead to contagion across asset classes, markets, and regions”, he says introducing the Financial Stability Review. Valuation is not solely about accounting, he underlines, but also central to internal risk measurement and management, capital requirements, solvency analysis, and financial stability, he states.
“In this crisis, in the absence of well-established definitions about when markets stop to qualify as “active markets”, or what “an observable market price” or “distress sale price” is financial institutions were left to use their own judgement as to whether, and when, to move from one mark-to-market valuation method to another”, Noyer says.
“A direct consequence of inconsistent valuation practices is that investors, counterparties, and regulators were not in a position to have a reliable view of financial institutions’ relative risk profiles.”