Fair Value Accounting and Regulatory Capital Requirements

The authors describe an empirical study of fair value accounting, applying to data on Japanese banks the analytical methods of Barth, Landsman, and Wahlen. They also discuss a further study of regulatory risk in capital requirements associated with fair value accounting, focusing on banks with low Basle capital adequacy ratios. This is a different approach from that of Barth, Landsman, and Wahlen. In the United States, these authors calculated capital ratios on a fair value accounting basis with unrealized securities profits. Using these figures, they tested how fair-value-based violations help predict actual regulatory capital violations and to what extent investors recognize this potential increased regulatory risk. This paper investigates, using actual Basle adequacy ratios, the regulatory risk in capital requirements associated with fair value accounting