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Measuring Fair Value When Markets Malfunction: Evidence from the Financial Crisis

In this paper we focus on fair value measurements in the Financial Crisis and its (continuing) aftermath. We consider different ways of measuring fair value; and we use the experience of economies under stress, and where markets deviate significantly from textbook models of symmetric information and perfect competition, to trace some perverse economic consequences of fair value measurement choices prescribed by accounting standard setters. We draw on anecdotal and case evidence from the banking crisis and its aftermath for the wider economy. The discussion focuses particularly on banks’ balance sheets and then on pension liabilities across all sectors.