A study is presented that investigates the assertions of critics of the use of fair value accounting to estimate the value of investment securities. The regulatory risk associated with capital adequacy ratios based on fair value accounting is addressed using earnings calculated through the use of disclosed fair value estimates of banks' investment securities and Basle capital adequacy ratios. Athough earnings are more volatile under fair value accounting, this increased volatility does not necessarily represent a proxy of economic risk. The assertion that investors generally demand an excessive premium because of the increased volatility associated with fair value accounting is not supported by any strong empirical evidence. When investors value low-capital-ratio banks' shares, fair value earnings provide more useful information than do historical cost earnings. The perceived volatility in fair value earnings incremental to that in historical cost earnings in the valuation of low-capital-risk banks' shares can be interpreted as regulatory risk associated with fair value accounting and it indicates the importance of the accounting framework of the Basle capital adequacy formula.