Its purpose was to determine what should be done with prudential standards to safeguard recovery. This was no ordinary regulatory convention. Marriner S Eccles, Chairman of the Federal Reserve, called it “guerrilla warfare”. In one corner were the regulators, the Comptroller of the Currency and FDIC. Scarred by their regulatory experience, and fearing further bank failures, the Comptroller and FDIC pushed for high prudential standards, including preservation of fair values for banks’ assets. In the other corner was the Fed. Scarred by their monetary policy  2  Pacioli (1494). 3  Goethe (1796). 4  Simonsen and Hempel (1993) provide a fascinating account of this episode. 2  BIS Review 28/2010  experience, and fearing a further collapse in lending, the Fed argued for laxer prudential standards and the abandonment of fair values. Battle commenced. The tussle lasted two months, often played out in public through the New York Times. In the end, the Fed prevailed. On 26 June 1938, Franklin D Roosevelt announced (without so much as a hint of irony) the Uniform Agreement on Bank Supervisory Procedures. Banks’ investment grade assets were to be valued not at market values but at amortised cost. And banks’ sub-investment grade assets were to be valued at a long-run average of market prices. In the teeth of crisis, and in the interests of macroeconomic stability, the first phase of fair value had ended. This pattern was to be repeated half a century later – the second wave of fair value.
During the 19th century, the published accounts of Spanish banks became less frequent during episodes of crisis. Mussolini’s Italian government of 1931 went one step further, suspending publication of accounts by the banks to forestall panic. 14 It is unlikely Goethe and Mussolini would have agreed on the merits of double-entry. While less extreme, there is compelling evidence of British banks having massaged balance sheets from the late 19th century right up until the early 1970s, especially during crisis. Typically, this involved the systematic under-valuation of assets to allow hidden reserves to be carried on the balance sheet. The experience of UK banks in 1952 was typical. As the prices of government securities fell sharply, the basis for valuation by banks was shifted from “at or below market value” to “at or under cost”. This mirrored the Roosevelt and Bush forbearance announcements of 1938 and 1990. The motives for hidden reserves among UK banks were purportedly prudential, as protection against the “excessive dividend expectations” of shareholders and as a cushion against losses in crisis. 15 Although the Companies Act of 1947 prohibited the use of hidden reserves, the banks were exempt from its provisions. But the writing was on the wall. Non-disclosure by banks came under repeated fire during the 1960s. Sensing the inevitable, British banks “voluntarily” decided to pursue full disclosure in 1969, in the interests of shareholder transparency and protection, though there is evidence of hidden reserves persisting right up to the 1980s. 14  James (1992). 15  Billings and Capie (2009).