【正文】 y, Li (2020) documents that debt contracts often exclude fairvalue changes in accountingbased debt covenants. These examples demonstrate that it is not clear that contagion and procyclicality are best addressed directly in the accounting system. Perhaps these issues are better left to the prudential regulators and contracting parties, who in turn can make adjustments to the numbers reported in the financial statements as they see fit. In our view, this is an interesting issue for future research. In summary, Allen and Carletti (2020) and Plantin et al. (2020a) provide important contributions to the FVA debate by illustrating potential contagion effects. However, they do not 12 However, as we discuss in Section 5, using these mechanisms may open the door to ma。L crisis earlier. 10leverage in booms is an issue that merely arises under FVA. Besides, it is not clear that procylical lending should be addressed by adjusting the accounting rules. For instance, we could bine FVA with dynamic prudential regulation, ., forcing banks to build up larger reserves in good times and to draw on them in bad times, in order to counter the procyclical effects of capital requirements on lending (., Kashyap and Stein, 2020). Put differently, it might be more appropriate to adjust banking regulation, rather than the accounting system, given that accounting numbers are used in many other contexts. The second argument is that FVA can provoke contagion in financial markets. The basic idea is that banks may (have to) sell assets at a price below the fundamental value and that the price from these (forced) sales bees relevant to other institutions that are required by FVA to mark their assets to market (Allen and Carletti, 2020。 Banque de France, 2020。 Brunnermeier and Pedersen, forthing). However, this spiral is not related to the accounting system。 that prices could be distorted by market inefficiencies, investor irrationality or liquidity problems。neberger and Ashish Shenoy for their excellent research assistance. Christian Leuz gratefully acknowledges research funding provided by the Initiative on Global Markets (IGM) at the University of Chicago Booth School of Business. Christian Laux gratefully acknowledges research funding provided by the Center for Financial Studies (CFS) at the GoetheUniversity Frankfurt. Electronic copy available at: 11. Introduction The recent financial crisis has turned the spotlight on fairvalue accounting (FVA) and led to a major policy debate involving among others the . Congress, the European Commission as well banking and accounting regulators around the world. Critics argue that FVA, often also called marktomarket accounting (MTM),1 has significantly contributed to the financial crisis and exacerbated its severity for financial institutions in the . and around the world.2 On the other extreme, proponents of FVA argue that it merely played the role of the proverbial messenger that is now being shot (., Turner, 2020。Electronic copy available at: Working Paper No. 33 The Crisis of Fair Value Accounting: Making Sense of the Recent Debate Christian Laux GoetheUniversity Frankfurt Christian Leuz The University of Chicago Booth School of Business amp。nther Gebhardt, Claudia Lambert, Haresh Sapra, Hyun Shin, and Marco Trombetta. We thank Dominik Sch246。L) crisis, this concern should not be underestimated. Thus, standard setters and enforcement agencies face a delicate tradeoff (., between contagion effects and timely impairment). Fourth, we emphasize that a return to historical cost accounting (HCA) is unlikely to be a remedy to the problems with FVA. HCA has a set of problems as well and it is possible that for 3certain assets they are as severe, or even worse, than the problems with FVA. For instance, HCA likely provides incentives engage in so called “gains trading” or to securitize and sell assets. Moreover, lack of transparency under HCA could make matters worse during crises. We conclude our article with several suggestions for future research. Based on extant empirical evidence, it is difficult to evaluate the role of FVA in the current crisis. In particular, we need more work on the question of whether market prices significantly deviated from fundamental values during this crisis and more evidence that FVA did have an effect above and beyond the procyclicality of asset values and bank lending. In Section 2, we provide a quick overview over FVA and some of the key arguments for and against FVA. In Section 3, we pare FVA and HCA and shortly discuss fundamental tradeoffs involved when choosing one or the other. In Section 4, we discuss the concern that FVA contributes to contagion and procyclicality as well as ways to address this concern, including how current accounting practices help to alleviate problems of contagion. We consider potential implementation problems in Section 5. In Section 6 we take a closer look at the banks’ positions on FVA and conclude with suggestions for future research in Section 7. 2. Fairvalue accounting: What is it and what are the key arguments? FVA is a way to measure assets and liabilities that appear on a pany’s balance sheet. FAS 157 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” When quoted prices in active markets for identical assets or liabilities are available, they have to be used as the measurement for fair value (Level 1 inputs). If not, Level 2 or Level 3 inputs should be used. Level 2 applies to cases for which there are observable inputs, which includes quoted prices for similar assets or liabilities in active markets, quo