| Abstract : | The global financial crisis that began in the summer of 2007 and had its roots mainly in the U.S. sub-prime mortgages, led into recession the international banking system. Many countries worldwide were affected and their economies went into recession. As a result, investors, creditors and generally all market participants lost their confidence in the banking system, which in turn started to face severe problems of liquidity. Both leverage and the application of the Fair Value Accounting approach seem to be major amplifiers of the recent crisis.Greece could not have been unscathed. Our country has been confronted with serious financial and political problems. The Greek economy as well as the Greek banking system has to make large changes and adapt in the new extreme financial conditions in order to keep healthy and finally manage to overcome the financial crisis.This paper studies how the broader adoption of Fair Value Accounting and the increased financial intermediaries’ leverage contributed to the global financial crisis.It is separated into seven chapters.The first chapter of the paper presents the main causes of the global financial crisis and its expansion in the European and the Greek economy.The second chapter presents the impact of the global financial crisis on the Greek banking system and the measures that Greek government had to take in order to keep the banking system strong and strengthen its liquidity. It describes the Accord of Basel I, II and III and their weaknesses. It also deals with the Greek Government Bonds’ “haircut” and the new agreement of the Eurozone.The third chapter describes the applied accounting standards worldwide such as GAAP, IAS and IFRS and the accounting standards boards responsible for the issue and application of accounting standards. In addition, it describes IAS 39: Financial Instruments- Recognition and Measurement, the model of Fair Value and its application.The fourth chapter presents the way in which the application of Fair Value Accounting affected the banking sector before the global financial crisis. It presents both advantages and drawbacks of the Full Fair Value Accounting application, the criticism that it accepted and the related supervisory problems.The fifth chapter discusses the effect of Fair Value Accounting during the recent financial crisis. It describes the modifications of FVA, the benefits and the disadvantages of FVA during the recession. Furthermore, it presents the actions made by the largest Greek banks during 2009 and 2010 concerning their GGBs holdings and their removals from the Available-for-Sales category to the Held-to-Maturity category.Also, it makes a comparison between the way in which financial intermediaries managed their balance sheets during the LTCM crisis and the recent crisis.The sixth chapter presents the economic theory’s predictions about the potential impact of FVA on the whole economy-welfare. It gives a brief description of the economic conditions and the market prices’ role before the financial crisis and the connection between the price of bonds and property and its dependence on the accounting approach used. Moreover, it describes how FVA enhances the role of market prices and discusses the impact of leverage and FVA on the recent financial crisis.Finally the seventh chapter presents the conclusions about the impact of FVA and its contribution to the recent global financial crisis.In the end of the paper there are Appendix A and Appendix B. The first one presents briefly the Greek banking system. It describes Greek banks’ categories and activities. The Appendix B presents the investment securities of the six largest Greek banks,their actions made between 2009 and 2010influenced by the recent crisis and their effect.
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