The unstable core of global finance: Contingent valuation and governance of international accounting standards

Abstract

Accounting standards are the foundations of the financial regulatory edifice, and global financial governance is no more stable than the asset valuations that feed it. Yet for two decades and up to this day, no international accounting rule for financial instruments – the bulk of banks' balance sheets – has emerged that was more than a temporary fix, to be succeeded by further reforms. We show how banking regulators have been central to this dynamic and how their support for applying fair value accounting to financial instruments, the cornerstone of regulatory debate, has oscillated throughout the whole period. The two common international political economy approaches to global financial governance, which analyze it either as interest‐based bargaining or as ideas‐driven expert governance, fail to account for this pattern. In contrast, we show how the contingency of financial valuations itself has made it impossible for regulators to embrace or reject a stable set of accounting rules.

Economic statistics as political artefacts

“…Notes 1. This broad acceptance of headline indicators-figures for trade, unemployment, inflation, and so on-stands in contrast to frequent critical analyses of more obviously constructed metrics, such as the output gaps (Heimberger & Kapeller, 2017), financial risk (de Goede, 2004), credit ratings (Paudyn, 2013), or accounting standards (M€ ugge & Stellinga, 2015;Perry & N€ olke, 2006). 2.…”

Why performativity limits credit rating reform

“…Similar dynamics might appear in other regulatory domains pertaining to firms' valuation and risk measurement practices (FSA, 2009b; FSF andCGFS, 2009). For instance, Mügge and Stellinga (2015) have shown how the performativity of accounting standards has led to repeated ad-hoc modifications, both before and after the crisis. Here, the real-world effects of one particular measurement approach inevitably bolster the case for switching to another.…”

“…The solution of increasing firms' discretion in risk assessment procedures also has downsides, especially for systemically important financial firms that tend to neglect long term solvency in order to gain short term profits or competitive advantage. In such circumstances, abandoning micro-prudential stringency is unattractive (Mügge and Stellinga, 2015). Yet even if regulators were able to reduce regulatory reliance, the systemic effects of ratings would persist.…”

Valuing knowledge: The political economy of human capital accounting

“…Recent research has used these insights to extend the constructivist focus in IPE beyond an examination of the impact of economic discourse and language, to explore how apparently mundane technical and methodological practices such as macroeconomic indicators (Davis et al, 2012;Karabell, 2014;Kelley & Simmons, 2015;M€ ugge, 2016), accounting standards (Christophers, 2011;M€ ugge & Stellinga, 2015), financial risk metrics (Kranke & Yarrow, 2019) and international benchmarking practices (Broome & Quirk, 2015) also exercise important structuring effects on global economic policy: both directly, as the measurement of economic phenomena such as inflation has immediate distributive effects (M€ ugge, 2016); and indirectly, by framing the way in which governance problems are formulated and understood, 'locking in' certain theoretical understandings and assumptions and rendering phenomena that are harder to quantify less politically salient (Porter, 1996;Miller, 2008).…”