Fair Value Accounting and Model Price: An International Comparison of the Banks’ Trading Portfolios Structure and of their Risk/Return Ratio

Laurent Clerc * Directeur d'études et d'analyse des risques, Autorité de contrôle prudentiel et de résolution (ACPR). Contact : laurent.clerc2@acpr.banque-france.fr. Les vues exprimées dans cet article sont celles de l’auteur et ne reflète pas nécessairement celles de la Banque de France ou de l’ACPR. Je remercie Thomas Allen et Stéphane Dees pour leur lecture attentive et leurs suggestions.
Didier Marteau Professeur d’économie, ESCP Europe. Contact : marteau@escpeurope.eu


At the onset of the financial crisis in 2007, “fair value” accounting came under fire for its pro-cyclical effects. Seven years on, fair value remains the sole method of accounting valuation of banks’ trading books. One concern, which is relevant to regulations aimed at preventing systemic risk, is based on the observation that accounting valuation of trading portfolios at “market price” is in fact minimal compared to “model price” valuation. In this paper, we assess the distribution of the valuation of trading portfolios, between “mark-to-market” and “mark-to-model”, at the international level. Then, we calculate a measure of return on equity (ROE) on trading activities by comparing the gross income to the amount of regulatory capital based on “value at risk” (VaR) and find that this ROE is not only abnormally high, but has also generally remained stable since the onset of the crisis. In addition, we establish that returns on banks’ trading activities are positively and significantly correlated to the share of assets subject to mark-to-model in the total portfolio, and particularly the share of “Level 3” assets.


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