In these cases, appropriate valuation techniques coupled with adequate guidance on the application of these techniques are needed in order to arrive at a reasonable estimate of the price at which an orderly transaction would currently take place between market participants. An entity should have in place adequate models that have been tested for accuracy in case the market is severely disrupted. Moreover, in rare circumstances, if the market dynamics are such that an institution may be forced to change its respective business model (i.e. shifting from a “day trading” to a “buy and hold” business model), then it should be able to reclassify financial instruments at amortised cost. These are important lessons to be learnt from the financial crisis. BIS Review 58/2010  1  Hence the ECB is of the opinion that fair value measurement should only be required if it is consistent with the institution’s business model and the characteristics of the particular underlying asset or liability. Which would be the worst drawbacks, if any, deriving from applying fair value in the light of the events happened in the last two years? Which are the positive aspects? In my view, the financial crisis has clearly highlighted the heightened pro-cyclicality stemming from two mutually reinforcing channels in the accounting framework: fair value accounting and the current loan loss provisioning practices (impairment methodologies). Fair value accounting – while certainly not being the “root cause” – served as an amplifier of stress in the financial system.

At the same time, it is crucial to carefully assess the macro-economic impact of the measures. In this context, the outcome of the quantitative impact assessment that is currently being conducted needs to be awaited before taking any final decisions. Inappropriate calibration of the measures may impact on the provision of credit to the real economy. This is particularly relevant for the EU financial system which is more bankdependent and where the substitutability between market finance and bank finance is more limited when compared to, for example, the US. The main challenge consists in ensuring a more resilient and stable financial system that neither compromises economic recovery nor unduly impinges on financial innovation. Second, we need to ensure that we effectively capture all systemically important financial institutions, products, markets and infrastructures within the scope of regulation. One of the lessons from the crisis was the need to make the shadow banking sector more transparent. This becomes more urgent as we tighten the regulatory net for the banking sector. Otherwise we may simply shift risks to unregulated or more loosely regulated entities. In this respect let me mention the OTC derivative markets. These markets should be subject to greater transparency by promoting the reporting of non-centralised trades to trade repositories. Additionally, we should promote the clearing of eligible OTC derivatives transactions through central counterparties, which should be themselves subject to high prudential and operational standards. Finally, we need to effectively address the risks posed by systemically important financial institutions.