Abstract
This chapter analyses the implications of FVA in the banking sector and in particular their impact on banks’ balance sheets and financial stability. A topic of debate, concerning the impact of fair value on financial institutions, is the potential effect of fair value on the volatility of reported earnings and the relationship between pro-cyclicality and FVA. The evidence is that an extensive application of fair values could excessively increase the volatility of banks’ balance sheets and might reduce banks’ capability to respond to distressed economic conditions. We can also appreciate how FVA affects bank regulatory capital and how the use of FVA implies that any liquidity or financial distress at large directly impacts on the level of prudential requirements for equity capital in the banking sector.
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