Financial decommodification: Risk and the politics of valuation in US banks

Bruce G. Carruthers*

*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceedingChapter

3 Scopus citations

Abstract

During the Global Financial Crisis of 2008, the American Bankers’ Association (ABA) publicly pressured the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) to suspend and/or modify “fair value” accounting rules. The gist of the ABA's argument was that continuing to mark the accounting value of bank assets to current market values had introduced unhealthy volatility into the financial system and had severely undermined the already precarious stability of US banks. Given the extraordinary economic conditions in 2007–2008, financial markets were said to be “illiquid,” “thin” and “distressed.” Under these circumstances, the bankers claimed, market prices had diverged far from “fundamental” or “intrinsic” asset values, even assuming there were enough transactions to generate a market price. Suspending or weakening “fair value” rules would enable bank valuations to reflect the true worth of assets rather than the “fire sale” prices that then prevailed in markets. Modification would also, the banks claimed, forestall downward spirals where banks would have to raise money in order to comply with bank capital standards, and since this required asset dumping in distressed markets (at “fire sale” prices), asset prices would continue to drop and the problem of non-compliance would worsen rather than improve. These valuation difficulties were particularly acute for over-the-counter (OTC) financial derivatives and swaps (bespoke bilateral contracts between a dealer-banker and a particular client), which seldom had a benchmark market price and were generally enshrouded in opacity. Supposedly, OTC participants could privately manage risk through the appropriate use of measures like credit ratings, or the posting of collateral, but the events of 2008 showed that such measures were inadequate. The ABA's intervention was remarkable in that a fundamental mode of capitalist valuation was so publicly questioned by a group of prominent and powerful capitalists. Among other things, fair value accounting rules were seen as truly objective, realistic, and less prone to manipulation by interested parties (Power 2010). In response to this political pressure, and in the context of the global financial crisis, regulators loosened bank accounting rules, and banks gained a greater measure of flexibility in how they valued their own assets.

Original languageEnglish (US)
Title of host publicationPolicy Shock
Subtitle of host publicationRecalibrating Risk and Regulation after Oil Spills, Nuclear Accidents and Financial Crises
PublisherCambridge University Press
Pages371-394
Number of pages24
ISBN (Electronic)9781316492635
ISBN (Print)9781107140219
DOIs
StatePublished - Jan 1 2017

ASJC Scopus subject areas

  • Social Sciences(all)

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