18  2.4 2.5 3.2 2.9 3.3 2.7 0.9 1.1 -8.7 17.7 25.6  -1.5 / -0.5 -4.7 -4.6 -4.7 -4.6 -5.7 5.5 -5.5 -3.6 20.0 22.2  -1.75 / -0.75 -5.3 -4.6 -5.0 -4.5 -5.9 6.0 -5.4 -4.9 20.2 24.3  2.25-3.25 2.2 2.6 2.9 2.4 2.5 3.0 1.2 -3.3 19.9 22.2  2.0-3.0 1.7 1.9 -0.2 2.5 2.5 3.2 0.9 -4.1 19.8 23.8
Both will be inaccurate to some degree but in opposite directions – the amortised cost measure suggesting valuations which are “too high”, while fair value will suggest valuations which are “too low”. The greater the initial  10  BIS Review 28/2010  misalignment in asset prices, and the smaller their subsequent overshoot, the greater the likelihood of fair values being preferred over amortised cost and vice-versa. Ultimately, however, this is an empirical question. In general terms, however, the point is clear: efficient markets are not necessary but may be sufficient to justify the use of fair value principles.   Better accounting for expected losses  What is clear from these examples is that there is a potential trade-off in the use of amortised cost versus fair value measures when market prices deviate from EMH. Both might give misleading signals, but in opposite directions. Recognising the problems with either, is there a way of doing better than both? Perhaps the simplest way of doing so would be to use both valuation metrics. There have already been suggestions that “dual” accounts could be drawn up. 24 The upside of this approach is that it would give regulators and investors more information on which to base assessments. It releases stakeholders from the need to pick a winner. The downside is that both valuations may be inaccurate, with a lack of clarity about which ought to be used, for example, to judge bank solvency. Or in the words of Macbeth’s three witches, “double, double, toil and trouble”.