QUANTITATIVE RESEARCH METHODS FOR FINANCE
The IFRS measures impact on French bank securities volatility during the financial crisis In Group with Mr Duchemin and Mr Melloul Benjamin CNUDDE
Introduction: The world of finance is from now global and has huge repercussions all over the planet as we could see during those last years of the recent recession. The subprime crisis triggered in the United States during the second half of 2006 has quickly turned into an international financial crisis with huge repercussions on the European financial markets. Banks and financial intermediaries were particularly affected by it because of the fair value accounting for financial instruments. As we all know, the real estate crisis in the United States has been the triggering element of the financial crisis which has initiated the international financial crisis we are facing now. Credit rarefaction and an obvious rise of market volatility were the fundamental consequences of the crisis. And to stop the proliferation of the crisis worldwide (especially provoked by the “toxic” assets owned by banks) comes the International Accounting Standards Board (IASB) intervention. We will discuss if such an intervention has managed to prevent a rise of the French banks securities volatility. In the financial crisis we are passing through, many personalities criticized the installation of IFRS (International Financial Reporting Standards), and notably concerning the impact on fair value. According to Christine Lagarde (French Minister of Economy, Industry and Employment during its audition by the commission of finance and senate) their use would lead to a decrease of the banks’ valorization. Others, on the contrary, consider that international accounting standards put in place cannot be charged of being responsible of the current crisis and support the idea that IFRS intervention leads to an early diagnosis of the financial problems. We will see and discuss in what the application of the standard IAS 39, which forms the basis form of valuation to the fair value in IFRS, have an impact (positive or negative) on the valuation and on the volatility of the assets of investment and financing banks.
According to PLANTIN G, banks and financial intermediaries have always reacted to the evolutions of economic environment, but valorization in value of market amplifies and develops synchronous reactions, thus worsening their effects on the capital markets. Indeed, for the banking companies sector, at each closing of accounts and/or each publication of quarterly results, the financial asset value reflects upwards or downwards variations of the market valorization. And in this time of markets instability, the balance sheet and the profit and loss account of the banks and others financial companies become extremely volatile especially if the considered assets are made of loans financed by structured borrowing or by risky derivatives assets. These variations of erratic value generate two complementary effects. The first implies the appearance of a lack of confidence which is likely to settle inside the interbank sphere and which is justified by the ignorance of the assets’ real value at the balance sheet. In this case, banks do
not lend themselves anymore. The second effect leads investment banks or loan companies which lent money without a sufficient insurance of equities to a significant risk of failure. Indeed they were suddenly out of resources because they still supplied themselves on the money market. Gil G considers that the method of the fair value applied to all financial instruments is not careful because it induces important fluctuations of the result and shareholders’ equity. Such a volatility can be the cause of disordered behaviors from the observers and markets. But it is primordial for our study to well understand what volatility is and how we measure it. By definition, a variable is volatile if it presents huge...
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