In order to achieve this, financial statements must – in the case of instruments for which it is economically relevant – be sensitive to price signals from markets, which reflect transaction values. I believe that two elements are important in this argument. The first is that financial statements have the crucial merit of providing information. The second is that the rationale of fair value valuation contains within it its own limitations. The concept of "transaction", which is  BIS Review 160/2008  1  fundamental in this context and, as a result, that of "market", should constitute the limits of the scope of application of fair value accounting. Are accounting choices neutral? It goes without saying that the greater sensitivity of balance sheets to market fluctuations resulting from fair value accounting obviously has an impact on financial stability. A central banker may legitimately wonder whether accounting conventions are neutral with respect to the behaviour of financial players and market dynamics. The current crisis and volatility that we have been faced with over the past few months suggest that accounting conventions have an impact in terms of financial incentives and may have had a not insignificant impact on financial players' strategies. One example serves to illustrate this point. It is macroeconomic in nature and relates to risktaking by financial institutions. It is the possibility, in the case of some instruments, of recording as of the first trading day all of the discounted future profits even though the risks remain on the balance sheet.

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.