The financial valuation crisis

The way in which financial firms valuate their assets and liabilities directly affects their behaviour and financial stability. The 2007-2009 global financial crisis exposed fundamental problems in firms' valuation approaches and the regulations designed to bolster them. In response, policymakers have tried to tackle the destabilising effects of accounting practices, credit ratings and banks' risk models. These attempts have had limited effects, however. Bart Stellinga argues that this lack of progress stems from an underlying issue: valuation practices do more than just measure financial risk, but actually shape them.