Procyclical Accounting

Following up on my post labelled 'the most hated accountant in the world'[1], if you stick with the videos of the interview with Sir David, near the end of part 3 of the interview he admits that regulating banks on the basis of financial statements 'would be pro-cyclical', and another way needs to be found. As I understand it, banks have been regulated on the basis of financial reporting so this amounts to an admission that accounting in its current form, ie using fair values, is promoting cyclical behaviour, which is another way of saying causing financial instability. Since the remit of IASB includes some general economic objectives, as well as providing information for financial decisions, it would appear that current standards are not meeting those objectives.

[1] Sir David styled himself thus after debate on the IASB's pensions standard, which has itself contributed to a certain amount of financial misery and transfer of risk to those least able to bear it, pensioners, as well as having its own procyclical effects.