Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/25483
Authors: 
Allen, Franklin
Carletti, Elena
Year of Publication: 
2006
Series/Report no.: 
CFS Working Paper 2006/17
Abstract: 
When liquidity plays an important role as in times of financial crisis, asset prices in some markets may reflect the amount of liquidity available in the market rather than the future earning power of the asset. Mark-to-market accounting is not a desirable way to assess the solvency of a financial institution in such circumstances. We show that a shock in the insurance sector can cause the current value of banks’ assets to be less than the current value of their liabilities so the banks are insolvent. In contrast, if historic cost accounting is used, banks are allowed to continue and can meet all their future liabilities. Mark-to-market accounting can thus lead to contagion where none would occur with historic cost accounting.
Subjects: 
Mark-to-market
Historical Cost
Incomplete Markets
JEL: 
G21
G22
M41
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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