These two factors, i.e. price volatility over the financial cycle and the limits of quantitative techniques highlight a number of divergences between internal risk management and fair value accounting. More generally, the application of accounting rules, which give the value of a company or activity at a given moment, does not always allow the forward-looking valuation of financial instruments or sound risk management practices. Yet these aspects are important for prudential authorities. Conversely, choices in terms of prudential regulation can have an impact on financial stability when they interact with certain accounting rules. For instance, the hitherto favourable treatment given by prudential rules to the trading book has without doubt encouraged behaviour aimed at generating very shortterm profits via transactions booked at market value. Like me you will have noted that, in their press release in November, the G20 Heads of State and Government gave particular attention to accounting issues. The work programme they have assigned to ministers and experts addresses several areas. It is aimed at "harmonising accounting standards, particularly for complex instruments, during times of stress". It also aims to "address weaknesses in accounting and disclosure standards for off-balance sheet  2  BIS Review 160/2008  vehicles". Lastly, it aims to "enhance the required disclosure of complex financial instruments by firms". The Heads of State and Government have assigned an ultimate objective to accounting standard setters, i.e. the creation of a "single high-quality global standard". It is striking that the attention given to accounting issues is linked to financial stability considerations.

If we are to believe the financial industry itself, this possibility has an impact on investment strategies. It cannot be ruled out that because this rule makes it possible to record substantial income flows during cyclical upswings, it has contributed to greater risk-taking by some institutions in order to maintain these income flows year after year. In a more general way, the extension of the scope of application of fair value accounting has very probably, during cyclical upswings, also contributed to many assets being accounted for at market value whereas the intention of market participants to manage these assets on a fair value basis was not clear. My aim here is not to make a judgement about the relative merits of accounting choices. It is to highlight the fact that these choices have implications that go beyond accounting policy. In concrete terms, therefore, the question that we need to ask collectively is: what is the optimum policy response? Do accounting conventions need to be modified? Or can other regulatory frameworks correct these effects? Consistency of valuation rules This leads me to the last point that I would like to an address today: the consistency of rules and practices with respect to valuation. There are currently differences of approach between accounting practices, prudential regulation and risk management practices. It is thus wholly accepted in the financial industry that there is inevitably uncertainty surrounding the valuation of financial instruments, particularly when they are complex or illiquid. In addition, the limitations of mathematical models are recognised.