Citation for published version (APA): Stellinga, B. J. P. (2018). The financial valuation crisis: The inherent limits to taming unstable markets.

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1 UvA-DARE (Digital Academic Repository) The financial valuation crisis Stellinga, B.J.P. Link to publication Citation for published version (APA): Stellinga, B. J. P. (2018). The financial valuation crisis: The inherent limits to taming unstable markets. General rights It is not permitted to download or to forward/distribute the text or part of it without the consent of the author(s) and/or copyright holder(s), other than for strictly personal, individual use, unless the work is under an open content license (like Creative Commons). Disclaimer/Complaints regulations If you believe that digital publication of certain material infringes any of your rights or (privacy) interests, please let the Library know, stating your reasons. In case of a legitimate complaint, the Library will make the material inaccessible and/or remove it from the website. Please Ask the Library: or a letter to: Library of the University of Amsterdam, Secretariat, Singel 425, 1012 WP Amsterdam, The Netherlands. You will be contacted as soon as possible. UvA-DARE is a service provided by the library of the University of Amsterdam ( Download date: 02 Apr 2019

2 The financial valuation crisis the inherent limits to taming unstable markets The way in which financial firms valuate their assets and liabilities directly affects their behavior and therefore financial stability. The global financial crisis exposed fundamental problems in firms valuation approaches and the regulations that bolstered them. In response, policymakers set out to tackle the most pressing issues, in particular the destabilizing effects of accounting practices, credit ratings, and banks risk models. Yet, despite a flurry of changes, policy progress in Europe and elsewhere has been limited. What explains this? In this book, I argue that lack of progress stems from an underlying issue: valuation practices do more than just measure financial risks they shape them. Practices deemed conducive to financial stability can significantly alter market functioning, potentially contributing to instability over time. This introduces a major problem for policymakers, as there is no stable link between firms valuation approaches and financial stability. Worse still, public prescriptiveness might stimulate herd behavior, as it mandates widespread use of inevitably deficient valuation routines. Policymakers thus often embraced incremental reforms, for want of something better. In the book s conclusion, I discuss policy options to deal with this regulatory problem. The Financial Valuation Crisis the inherent limits to taming unstable markets BART STELLINGA

3 THE FINANCIAL VALUATION CRISIS The inherent limits to taming unstable markets Bart Stellinga

4 Bart Stellinga, 2018 Cover design: Wilco Prinsen Print: Printed, Den Haag

5 THE FINANCIAL VALUATION CRISIS The inherent limits to taming unstable markets ACADEMISCH PROEFSCHRIFT ter verkrijging van de graad van doctor aan de Universiteit van Amsterdam op gezag van de Rector Magnificus prof. dr. ir. K.I.J. Maex ten overstaan van een door het College voor Promoties ingestelde commissie, in het openbaar te verdedigen in de Agnietenkapel op dinsdag 11 december 2018, te 14:00 uur door Bart Jelle Paape Stellinga geboren te Amsterdam

6 Promotiecommissie Promotor: Prof. dr. D.K. Mügge Universiteit van Amsterdam Co-promotor: Prof. dr. G.R.D. Underhill Universiteit van Amsterdam Overige leden: Prof. dr. A.W.A. Boot Universiteit van Amsterdam Prof. dr. M. de Goede Prof. dr. J.H. Zeitlin Prof. dr. E. Jones Prof. dr. L. Seabrooke Universiteit van Amsterdam Universiteit van Amsterdam Johns Hopkins University Copenhagen Business School Faculteit der Maatschappij en Gedragswetenschappen

7 Table of Contents Overview of articles in this thesis... 9 Funding information List of abbreviations Introduction The financial valuation crisis Gaps in the existing literature The reflexivity problem The research focus Outline of the thesis Theorizing the politics of financial valuation Introduction Governing financial valuation The politics of financial regulation Financial markets as a reflexive system The politics of financial valuation Focus and methods Conclusion The unstable core of global finance. Contingent valuation and governance of international accounting standards Introduction The rise of international accounting standards Preference formation in global accounting standard setting Financial stability and ambiguous accounting preferences The Full Fair Value proposal ( )... 90

8 3.6 The IAS 39 controversies ( ) The financial crisis and IFRS 9 ( ) Conclusion Mitigating the systemic risk of credit ratings. Performativity as a stability threat and as a regulatory problem Introduction Systemic problems, a timid response The regulatory implications of performativity Re-regulation and its limits Conclusion The regulator s conundrum. How market reflexivity limits fundamental financial reform Introduction High hopes, unmet expectations The regulator s conundrum The regulator s conundrum in practice Conclusion Fighting the financial cycle. Macroprudential policy, endogenous risks, and regulatory timidity Introduction The coming revolution in financial regulation The paradigm shift that got stuck The limits to countercyclical policy Conclusion Conclusion Introduction Main findings

9 7.3 Academic relevance Suggestions for further study Policy implications References Interview list Summary Samenvatting Acknowledgments

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11 Overview of articles in this thesis This thesis is based on five stand-alone articles, three of which have already been published. The bibliographic details of the published articles are as follows: Stellinga, B. (2014) Accounting standards, pp , in: Mügge, D.K. (ed.) Europe and the Governance of Global Finance, Oxford: Oxford University Press. Mügge, D.K. and Stellinga, B. (2015) The unstable core of global finance: contingent valuation and governance of accounting standard setting, Regulation & Governance, 9 (1): Stellinga, B. and Mügge, D.K. (2017) The regulator s conundrum. How market reflexivity limits fundamental financial reform, Review of International Political Economy, 24 (3): For the two co-authored articles, both authors contributed in equal manner. The two articles that at the time of writing have yet to be submitted are single-authored. 9

12 Funding information This work was supported by the European Commission Research Director General, Horizon 2020 Framework Program under the grant European Legitimacy in Governing through Hard Times (# ENLIGHTEN) 10

13 List of abbreviations AFS AMF ARC BCBS BIS CCB CEBS CESR CGFS CRA CRD CRR EBA EBCI EBF EC ECB EFAMA EFR EMIR ESMA ESRB EU EUP EWI FASB FFVA FPC Available-for-Sale Asset Management Fund Accounting Regulatory Committee Basel Committee on Banking Supervision Bank for International Settlements Countercyclical Buffer Committee of European Banking Supervisors Committee of European Securities Regulators Committee on the Global Financial System Credit Rating Agency Capital Requirements Directive Capital Requirements Regulation European Banking Authority European Bank Coordination Initiative European Banking Federation European Commission European Central Bank European Fund and Asset Management Association European Financial Services Round Table European Market Infrastructure Regulation European Securities and Markets Authority European Systemic Risk Board European Union European Parliament Early Warning Indicator Financial Accounting Standards Board Full Fair Value Accounting Financial Policy Committee 11

14 FSA FSAP FSB FSF FVA FVO GAAP G-SII HCA HQLA IAS IASB IASC IFRS IMF IOSCO IPE IRB JWGBA JWGSS LTI LTV MBS NSFR OCC OECD OEP O-SII PIT SARG Financial Services Authority Financial Services Action Plan Financial Stability Board Financial Stability Forum Fair Value Accounting Fair Value Option Generally Accepted Accounting Principles Global Systemically Important Institution Historical Cost Accounting High Quality Liquid Asset International Accounting Standard International Accounting Standards Board International Accounting Standards Committee International Financial Reporting Standard International Monetary Fund International Organization for Securities Commissions International Political Economy Internal Ratings Based Joint Working Group of Banking Associations Joint Working Group of Standard Setters Loan-to-Income Loan-to-Value Mortgage-Backed Security Net Stable Funding Ratio Office of the Comptroller of the Currency Organisation for Economic Cooperation and Development Open Economy Politics Other Systemically Important Institutions Point-in-Time Standards Advice Review Group 12

15 SEC SSF STS TTC VoC Securities and Exchange Commission Social Studies of Finance Science and Technology Studies Through-the-Cycle Varieties-of-Capitalism 13

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