Research on the Use of Fair Value in Commercial
Banks
Abstract:In the late 19th century， the concept of fair value is proposed in the United States， and scholars have made the relevant theoretical research. After the crisis of saving， fair value measurement is widely used. In the investigation about crisis causes， the regulatory authorities found that users of financial reports don't keep abreast of changes the price of financial assets because of historical cost measurement. So， FASB and IASB decided to use fair value as financial instruments' measurement. However， the development process of fair value measurement is not smooth. Banking sector and financial regulators have questioned the reliability of fair value measurement， and they think that the use of fair value will increase the volatility of the financial condition and results of operations. In the subprime mortgage crisis， the pro-cyclical effect， which is caused by the fair value measurement， magnified the losses of financial institutions and risk. Citigroup， Merrill Lynch， UBS and other large multinational financial institutions were extremely dissatisfied with fair value measurement. Executives of financial institutions claimed that financial crisis will be intensified because of the use of fair value measurement in financial derivatives. Therefore， they requested that FASB should completely abolish or suspend the fair value accounting. The U.S. Congress passed the 2008 Emergency Economic Stabilization Act， and requested the suspension of mark to market accounting. Meanwhile， the U.S. Congress also requires the Securities and Exchange Commission investigated the influence of mark to market accounting for the financial crisis.
The accounting professions were against t views of financial institutions. Many scholars think that fair value accounting is a model for measurement， which focuses on the dynamic process of assets and liabilities， and reflects the expectation of the
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value of an asset on current economic conditions. Compared with the historical cost accounting， the financial information based on the use of fair value accounting is much more relevant. The \factors. The main causes of the “pro-cyclical effect\Accounting Standards and financial regulatory system， and the irrational reaction in market. More precisely speaking， the main causes of financial crisis are that financial institutions violated economic laws and financial regulatory authorities aren't aware of the risk behind asset bubbles. Fair value accounting faithfully reflects the change of derivative financial instruments' value， and timely reveals the credit risk and market risk which are hidden behind the changes of the value. The executives of financial institution just want to use fair value accounting to shirk the responsibility in the subprime mortgage crisis. In the study on mark-to-market accounting. Securities and Exchange Commission also pointed out that the fair value measurement is not the cause of the financial crisis， and the real cause of the financial crisis is the economic structural imbalances， weak financial regulation and excessive financial innovation. It does not make better financial crisis that suspend ox repeal of fair value accoxmting. On the contrary， it will increase the uncertainty of capital markets and lower investors' confidence in the economic recovery. Under the current circumstances， fair value is the best choice， although it is not perfect.
Although the fair value measurement is the best measurement for financial derivatives， the unreasonable use of it certainly has further deepened the financial crisis The U.S. Financial Accounting Standards Board and International Financial Accounting Standards Board are concerned about problems which exist in the use of fair value. On the basis of extensive solicitation of the problems and solution in the use of fair value measurement， International Financial Accounting Standards Board finally issued the International Accounting Standard No. 13-Fair Value Measurements
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in 2011. The guidelines define the principles for the use of fair value measurement in practice， and establish a new framework of fair value measurement. The International Financial Accounting Standards Board provided that the International Accounting Standard No. 13 - Fair Value Measurements would be totally implemented in order to promote the harmonization of fair value in worldwide. Financial instruments are the main field of fair value measurement， and the banking sector possesses the most financial assets and liabilities in all enterprises. So， fair value measurement is very important for commercial banks. The financial sector is the agency for the allocation of resources in the contemporary economical society and commercial banks play a crucial role in the financial system. So， almost everyone knows the importance of fair value measurement. Accounting standard-setting institutions and financial regulatory authorities is also aware of this point in the current financial crisis. They are particularly concerned about the use of fair value measurement in the banking industry; and issued a series of rules and regulations for the flaws of fair value measurement.
The Ministry of Finance pulled the concept of fair value in the Chinese Accounting Standards inl997. They expected that stakeholders of the enterprise got more transparent， relevant financial information through the application of fair value. However， due to immature capital market， the imperfect economic system， the imperfect regulatory system and many other reasons， many listed companies used fair value as a means to manipulate profits. In order to control the situation of abuse of fair value， the Ministry of Finance substantially modified the Financial Accounting Standards， and completely avoided the fair value measurement model in 2001. Until 2006，in order to achieve the convergence of the Financial Accounting Standards and the International Common Criteria， the Ministry of Finance issued CAS No.3-- Investment Property， CAS No.12- Debt Restructuring， CAS No.22-
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Financial Instruments Recognition and Measurement， CAS No.23-Transfer of Financial Assets， CAS No.24- Hedging， and CAS No.37- Presentation of Financial Instruments. The core of these accounting standards is how to use the fair value measurement model under the right conditions， and reveal the true financial condition and operational results of commercial banks in order to provide more relevant， reliable and transparent accounting information for users of financial statements. According to statistics， listed banks have become the most important part in Chinese stock market. The performance of the listed banks and the price of shares of listed banks have a decisive influence on the entire Chinese stock market. The authors study the use of fair value measurement in China's banking industry by analyzing the publicly available financial reports of listed banks， and proposed some recommendations about the promotion of fair value measurement.
This paper was divided into five chapters as follows:
Chapter I is the introduction of the research background， the significance of Research on the Use of Fair Value in Commercial Banks the study， review of domestic and foreign research results on the fair value， the content and technique of this article， as well as the contribution and the weak points.
Chapter II is the theory about fair value measurement. This chapter explains the importance of the fair value， and compares the research results of the domestic and international standards setting bodies， and describes the content and features of the fair value. Then， this chapter analyzes the links and differences between the historical， cost of present value， replacement cost and fair value.
Chapter III is the performance of fair value measurement in the banking industry. This chapter analyzes the use of fair value in investment property， financial instruments， hedging and repossessed assets
Chapter FV is the analysis of impact on the fair value used in commercial banks.
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This chapter analyzes the impact on the financial indicators， financial condition， results of operations and regulatory.
Chapter V is recommendations for improvement of fair value used in commercial banks and vision for the future of the fair value.
The main contribution of this paper is reflected in three aspects. First， many scholars have systematically studied the use of fair value in commercial banks， but these research are concentrated in the macroeconomic field. This article reveals the actual situation of the fair value used in the specific applications of the commercial banks through the research on financial reports of listed banks， and summarizes accounting standards about fair value measurement， and explores the shortcomings of the fair value measurement in practice. Second， this article systematically reveals the manners， scope and extent of fair value used in Chinese commercial banks. Finally， before the implementation of International Accounting Standard No. 13 - Fair Value Measurements， this article puts forward the proposal toimprove fair value measurement.
The flaw of this paper is lack of study about the reaction of capital markets on fair value measurement information. Because of inadequate financial data， this paper can't expose the attitude of market participants on the fair value measurement. The authors want to be able to obtain sufficient data in the follow-up study to explore the correlation of stock price and the fair value of information.
Key Words：Fair Value Commercial Bank Banking Supervision
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