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Effects of Fair - Value Relaxation during a Crisis: What are the Costs and Benefits? Evidence from the Reclassification of Financial Securities

Fair value accounting (FVA) rules were relaxed through an ad-hoc amendment of IAS 39 at the height of the financial crisis in October 2008. The extent to which the trade-off between financial stability and transparency implied by this measure was reflected in the reaction of bond and equity markets is analyzed in an event study setting. For credit markets, there is at most inconclusive evidence that transparency concerns dominated potential financial stability benefits implied by the reclassification option. For equity markets, the evidence that the October announcement implied financial stability gains for a subset of regulatory constrained banks is weak. Overall, the results suggest that the financial stability benefits of the introduction of the reclassification option are contained.