Author(s): Ming-Hui Wang
This study examines the role of financial reporting in key areas such as fair value measurement, asset securitization, derivatives, and credit loss provisioning during the Financial Crisis. Given that banks were at the heart of the crisis, our analysis primarily explores the impact of their financial reporting practices. Our findings indicate that fair value accounting had minimal influence on the crisis. However, the lack of transparency in asset securitization and derivative reporting may have hindered investors’ ability to accurately assess the value and risks of bank assets and liabilities. Although the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have taken significant steps to enhance disclosures related to asset securitizations, we believe that the IASB’s Exposure Draft approach—which requires banks to recognize all assets and liabilities retained post-securitization—more accurately reflects the economic realities of these transactions. Regarding derivatives, we advocate for increased transparency through more detailed disclosures, sensitivity analysis of fair values in response to market risk factors, and a riskparity approach to help investors better understand leverage implications in derivative contracts. Furthermore, our study highlights the distinct objectives of financial reporting and banking regulations. Enhancing financial disclosures to improve capital market transparency does not necessarily align with regulatory changes aimed at maintaining financial system stability. We explore how credit loss provisioning may have contributed to the crisis by amplifying procyclicality and weakening market discipline. Ultimately, while accounting standard setters and bank regulators should collaborate on these issues, ensuring financial system stability remains the responsibility of regulators, not accounting bodies.