Download or read book Macroprudential Implications of Financial Instruments in Levels 2 and 3 for Accounting Purposes written by and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: As the global financial crisis showed, it is difficult to determine the fair value of some financial instruments, given the lack of liquidity in the relevant markets, the complexity of some of those instruments and the need, in a significant percentage of cases, to use unobservable inputs. Taking the current accounting framework as a given, this report discusses the macroprudential implications of financial instruments that are measured at fair value according to IFRS 9 and IFRS 13 (with a focus on those classified in Levels 2 and 3, since they are typically measured using models and other market-based techniques, as well as affording the greatest degree of discretion). The prudential regulatory framework distinguishes between exposures in the banking book and the trading book on the basis of the intentions underlying the holding of the financial instruments in question, with the former subject to prudential requirements relating to credit risk and the latter to prudential requirements relating to market risk. These instruments are also subject to the requirement to consider prudential valuation adjustments for all financial instruments measured at fair value. Given the limited evidence on the impact that the fair values of financial instruments in Levels 2 and 3 have on financial stability, this report adopts a descriptive approach, relying on supervisory reporting data provided by the European Banking Authority (EBA), a review of academic literature,2 and the financial statements of a small sample of European banks.