IDEAS home Printed from https://ideas.repec.org/p/osf/socarx/kcja3.html
   My bibliography  Save this paper

The Price of an Uncertain Promise: Fair Value Accounting and the Shaping of Bank Counterparty Risk Valuation Practices

Author

Listed:
  • Spears, Taylor C.

    (University of Edinburgh)

Abstract

How did the adoption of fair value accounting by the FASB shape the financial modelling practices used by market practitioners? Drawing on documentary sources, ethnographic fieldwork, and 52 interviews with financial economists and market participants, this article addresses this question by tracing the development and adoption of the mathematical models and associated infrastructures that derivatives ‘dealer’ banks use to assign value to the counterparty risk embedded in the ‘over-the-counter’ derivatives contracts they trade. Rather than reflecting a pre-existing consensus on the part of financial market participants in favour of valuation practices drawn from financial economics, this article suggests that the switch to fair value actively shaped the financial modelling and risk management practices used by dealers to value and manage this risk. While a number of material and institutional factors shaped the adoption of these practices, the switch to fair value ultimately ‘tipped the balance’ in favor of a particular set of practices that were preferred by a minority of investment banks. In explaining the development and adoption of banks’ counterparty risk modelling practices, this paper develops a hybrid theoretical approach that combines organisational institutionalism’s focus on meso-level field dynamics and the social studies of finance’s focus on materiality.

Suggested Citation

  • Spears, Taylor C., 2018. "The Price of an Uncertain Promise: Fair Value Accounting and the Shaping of Bank Counterparty Risk Valuation Practices," SocArXiv kcja3, Center for Open Science.
    • Handle: RePEc:osf:socarx:kcja3
    DOI: 10.31219/osf.io/kcja3
    as

    Download full text from publisher

    File URL: https://osf.io/download/5ac1d550a2409b0011a1bd0d/
    Download Restriction: no
    File URL: https://libkey.io/10.31219/osf.io/kcja3?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Ian Bond & Gareth Murphy & Gary Robinson, 1994. "Potential credit exposure on interest rate swaps," Bank of England working papers 25, Bank of England.
    2. Karl V. Lins & Henri Servaes & Ane Tamayo, 2011. "Does Fair Value Reporting Affect Risk Management? International Survey Evidence," Financial Management, Financial Management Association International, vol. 40(3), pages 525-551, September.
    3. Vollmer, Hendrik & Mennicken, Andrea & Preda, Alex, 2009. "Tracking the numbers: Across accounting and finance, organizations and markets," Accounting, Organizations and Society, Elsevier, vol. 34(5), pages 619-637, July.
    4. Beunza, Daniel & Stark, David, 2012. "From dissonance to resonance: cognitive interdependence in quantitative finance," LSE Research Online Documents on Economics 45604, London School of Economics and Political Science, LSE Library.
    5. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    6. John R. Walter, 1991. "Loan loss reserves," Economic Review, Federal Reserve Bank of Richmond, vol. 77(Jul), pages 20-30.
    7. Edward J. Carberry & Brayden G King, 2012. "Defensive Practice Adoption in the Face of Organizational Stigma: Impression Management and the Diffusion of Stock Option Expensing," Journal of Management Studies, Wiley Blackwell, vol. 49(7), pages 1137-1167, November.
    8. K. J. Arrow, 1964. "The Role of Securities in the Optimal Allocation of Risk-bearing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 31(2), pages 91-96.
    9. Treacy, William F. & Carey, Mark, 2000. "Credit risk rating systems at large US banks," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 167-201, January.
    10. Michael Power, 2010. "Fair value accounting, financial economics and the transformation of reliability," Accounting and Business Research, Taylor & Francis Journals, vol. 40(3), pages 197-210.
    11. T. H. Donaldson, 1983. "Understanding Corporate Credit," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-17325-9, October.
    12. Modell, Sven & Vinnari, Eija & Lukka, Kari, 2017. "On the virtues and vices of combining theories: The case of institutional and actor-network theories in accounting research," Accounting, Organizations and Society, Elsevier, vol. 60(C), pages 62-78.
    13. MacKenzie, Donald & Pardo-Guerra, Juan Pablo, 2014. "Insurgent capitalism: Island, bricolage and the re-making of finance," LSE Research Online Documents on Economics 57549, London School of Economics and Political Science, LSE Library.
    14. Vollmer, Hendrik & Mennicken, Andrea & Preda, Alex, 2009. "Tracking the numbers: across accounting and finance, organizations and markets," LSE Research Online Documents on Economics 27073, London School of Economics and Political Science, LSE Library.
    15. Erb, Carsten & Pelger, Christoph, 2015. "“Twisting words”? A study of the construction and reconstruction of reliability in financial reporting standard-setting," Accounting, Organizations and Society, Elsevier, vol. 40(C), pages 13-40.
    16. Keith C. Brown & Donald J. Smith, 1993. "Default Risk and Innovations in the Design of Interest Rate Swaps," Financial Management, Financial Management Association, vol. 22(2), Summer.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hélène Rainelli & Hélène Rainelli-Weiss, 2019. "Recherche en finance : quand la performativité invite à la réflexivité," Post-Print halshs-02025011, HAL.
    2. Pucci, Richard & Skærbæk, Peter, 2020. "The co-performation of financial economics in accounting standard-setting: A study of the translation of the expected credit loss model in IFRS 9," Accounting, Organizations and Society, Elsevier, vol. 81(C).
    3. Yasmine Chahed, 2021. "Words and Numbers: Financialization and Accounting Standard‐Setting in the United Kingdom," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 302-337, March.
    4. Huikku, Jari & Mouritsen, Jan & Silvola, Hanna, 2017. "Relative reliability and the recognisable firm: Calculating goodwill impairment value," Accounting, Organizations and Society, Elsevier, vol. 56(C), pages 68-83.
    5. Giampaolo Gabbi & Andrea Sironi, 2005. "Which factors affect corporate bonds pricing? Empirical evidence from eurobonds primary market spreads," The European Journal of Finance, Taylor & Francis Journals, vol. 11(1), pages 59-74.
    6. Timothy Johnson, 2015. "Reciprocity as a Foundation of Financial Economics," Journal of Business Ethics, Springer, vol. 131(1), pages 43-67, September.
    7. Faulconbridge, James R. & Muzio, Daniel, 2021. "Valuation devices and the dynamic legitimacy-performativity nexus: The case of PEP in the English legal profession," Accounting, Organizations and Society, Elsevier, vol. 91(C).
    8. Duffee, Gregory R., 1996. "On measuring credit risks of derivative instruments," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 805-833, June.
    9. André, Kévin & Cho, Charles H. & Laine, Matias, 2018. "Reference points for measuring social performance: Case study of a social business venture," Journal of Business Venturing, Elsevier, vol. 33(5), pages 660-678.
    10. Grunert, Jens & Norden, Lars & Weber, Martin, 2005. "The role of non-financial factors in internal credit ratings," Journal of Banking & Finance, Elsevier, vol. 29(2), pages 509-531, February.
    11. Fiordelisi, Franco & Marqués-Ibañez, David, 2013. "Is bank default risk systematic?," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 2000-2010.
    12. Power, Sean Bradley & Brennan, Niamh M., 2022. "Accounting as a dehumanizing force in colonial rhetoric: Quantifying native peoples in annual reports," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 87(C).
    13. Jakub W. Jurek & Erik Stafford, 2011. "The Cost of Capital for Alternative Investments," Harvard Business School Working Papers 12-013, Harvard Business School.
    14. Hall, Matthew, 2010. "Accounting information and managerial work," Accounting, Organizations and Society, Elsevier, vol. 35(3), pages 301-315, April.
    15. Merton, Robert, 1990. "Capital market theory and the pricing of financial securities," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 11, pages 497-581, Elsevier.
    16. Fantazzini, Dean, 2008. "Credit Risk Management," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 12(4), pages 84-137.
    17. Roberts, John & Wang, Timothy, 2019. "Faithful representation as an ‘objective mirage’: A Saussurean analysis of accounting and its participation in the financial crisis," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 65(C).
    18. Christoph Kuhner & Christoph Pelger, 2015. "On the Relationship of Stewardship and Valuation—An Analytical Viewpoint," Abacus, Accounting Foundation, University of Sydney, vol. 51(3), pages 379-411, September.
    19. Barker, Richard & Schulte, Sebastian, 2017. "Representing the market perspective: Fair value measurement for non-financial assets," Accounting, Organizations and Society, Elsevier, vol. 56(C), pages 55-67.
    20. Mantzari, Elisavet & Georgiou, Omiros, 2019. "Ideological hegemony and consent to IFRS: Insights from practitioners in Greece," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 59(C), pages 70-93.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:osf:socarx:kcja3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: OSF (email available below). General contact details of provider: https://arabixiv.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.