On 25 February 2020, the European Systemic Risk Board (ESRB) published a report on the macroprudential implications of financial instruments that are measured at fair value according to IFRS 9 and IFRS 13 (with a focus on those classified in Levels 2 and 3, since they are typically measured using models and other market-based techniques, as well as affording the greatest degree of discretion).

Given the limited evidence on the impact that the fair values of financial instruments in Levels 2 and 3 have on financial stability, the report adopts a descriptive approach, relying on supervisory reporting data provided by the European Banking Authority, a review of academic literature and the financial statements of a small sample of European banks.

Conceptually, the report identifies three main areas where financial instruments measured at fair value can affect financial stability and thus have a macroprudential impact. These relate to: (i) inaccurate valuation of financial instruments; (ii) possible volatility and illiquidity in times of stress (particularly for financial instruments classified in Levels 2 and 3); and (iii) inadequate reflection of underlying risks in the prudential framework.