An Integrated Framework for IFRS Fair Value Accounting and Institutional Risk Capital Reporting

44 Pages Posted: 20 Feb 2009 Last revised: 23 Mar 2009

See all articles by Gavin Lee Kretzschmar

Gavin Lee Kretzschmar

University of Edinburgh - Accounting and Finance

Axel Kirchner

University of Edinburgh

Alexander J. McNeil

Heriot-Watt University

Date Written: March 20, 2009

Abstract

The articulation of systemic risk drivers with complex bank balance sheet positions has proved a vexing valuation and disclosure problem for banking regulators and accounting practitioners alike. Global Banking failures in the period 2007-9 have lead to a host of regulatory and systemic reviews, all of which identify specific weaknesses in macro and micro prudential approaches to risk management and disclosures. Tellingly, however, all reports are silent as regards a coherent methodology for risk integration, an oversight shared with the Basel II, Pillar 2 and IFRS 7 frameworks.

Banks are expected to exercise and disclose market discipline by conducting stress tests for rare but plausible extreme events, calculating fair value for each major asset category and deriving institutional capital adequacy. Critically, however, both macro and micro prudential regulators remain silent as to methodological guidance for the computation, interpretation and integration of multivariate risk factors effects on asset fair value and capital adequacy. The unfortunate result is that a simplistic business silo approach to risk integration based on asset correlations( which commonly understate tail risk dependence) has been widely adopted by major financial sector institutions. We propose an integrated stochastic fair valuation framework for calibrating and interpreting the capital effects of banking portfolio responses to projected multivariate risk factors.

Keywords: IFRS 7, Risk, Basel, Banking, Disclosure, Turner Report

Suggested Citation

Kretzschmar, Gavin Lee and Kirchner, Axel and McNeil, Alexander J., An Integrated Framework for IFRS Fair Value Accounting and Institutional Risk Capital Reporting (March 20, 2009). Available at SSRN: https://ssrn.com/abstract=1345159 or http://dx.doi.org/10.2139/ssrn.1345159

Gavin Lee Kretzschmar (Contact Author)

University of Edinburgh - Accounting and Finance ( email )

William Robertson Building
Edinburgh EH8 9JY
United Kingdom

Axel Kirchner

University of Edinburgh ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

Alexander J. McNeil

Heriot-Watt University ( email )

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