Restoring traditional accounting principles sounds desirable, provided the (Italian) values we import are Pacioli rather than Mussolini. At the same time, it needs to be recognised that too much sunlight can scorch. That means applying appropriate filters to fair values, screening out their harmful rays. Rethinking valuation practices across firms, asset classes and countries, better to capture expected losses, is one important such filter. Recognising the liability as well as asset characteristics of institutions may be another. We need to ensure these changes do not erode fair value principles, as that would result in the baby being thrown out with the bathwater. Making fair values less foul ought to advantage both investors and regulators. It would protect fair value from lightening strikes when the next financial thunderstorm breaks. References Allen, F and Carletti (2007), “Market-to-Market Accounting and Liquidity Pricing”, Wharton Financial Institutions Centre Working Paper 06–15. Billings, M and F Capie (2009), “Transparency and Financial Reporting in mid-20th Century British Banking”, Accounting Forum, 38–53. Bronk, R (2009), The Romantic Economist, Cambridge University Press. 12  BIS Review 28/2010  Financial Accounting Standards Board (2009), “Financial Instrument: Improvements to Recognition and Measurement”, Financial Statement Presentation of Financial Instruments, 13 August 2009 (Board meeting handout). Federal Deposit Insurance Corporation (1997), History of the Eighties – Lessons for the Future. Friedman, M and A J Schwartz (1963), A Monetary History of the United States, 1867–1960, Princeton University Press. Goethe, J W (1796), Wilhelm Meisters Lehrjahre.

Consider, for example, a 10-year loan with regular interest payments which is intended to be held to maturity by a bank. These characteristics would justify the bank carrying the asset at amortised cost. But imagine this loan is funded with overnight loans. Whatever the intention, this liability structure would require early liquidation of the asset if funding were to dry up. In other words, the ability of a bank to hold assets to maturity may be as important as the intention. The greater the maturity mismatch, the greater the likelihood of liability characteristics dominating asset intentions. In other words, the case for using fair values is greater when balance sheets are maturity mismatched. Or, put differently, precisely because market prices  24  For example, FASB (2009). BIS Review 28/2010  11  embody a liquidity premium, they could give a better view of the true asset position of a firm facing liquidity constraints. For institutions facing funding pressure, liquidity premia may be a legitimate measure of fundamentals. And which companies’ balance sheets are most subject to such maturity mismatch? Banks. It has been argued that banks ought to be protected from the vicissitudes of market prices. But, given their maturity transformation role, the case may actually be stronger for banks than for other types of both financial (such as insurance companies and pension funds) and nonfinancial firms. For some banks, this may be the accounting convention that best aligns the economic characteristics of both assets and liabilities.