As institutions using IASB standards consider how to use the fair value option for their own financial reporting purposes, they should be aware of certain related complexities. For example, if loans are reported using the fair value option, changes in fair value would presumably affect loan loss allowances and thus regulatory capital, important asset-quality measures like nonperforming assets, and even net interest margins.
The Bank of Japan repeatedly cautioned against such wishful thinking, having experienced prolonged problems after Japan’s financial crisis in the 1990s. The Bank warned that downward pressure stemming from financial crises is likely to be persistent, and any signs of recovery observed shortly after the crisis could be a “false dawn”.