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Change in Mark-to-Market Rules Could Have Big Impact on Banks’ Balance Sheets

A key accounting standard was changed Thursday to allow banks more flexibility in mark-to-market rules, which help establish the value of assets. Analysts explain what impact this change in these rules could have for banks.

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  • JEFFREY BROWN:

    Accounting rules are not normally the stuff of front-page headlines or credited with boosting the stock market. But that's what happened today, as some otherwise obscure rules were changed.

    The rules in question are known as mark-to-market or fair value. Put simply, a bank's balance sheet is composed of a wide variety of assets, many of which are loans and securities.

    Under mark-to-market rules, a financial institution must value those loans and securities at the estimated prices they could fetch on the market currently. But these days, with markets essentially frozen, setting a real-world price for an asset is that much harder. And a debate has grown over whether mark-to- market accounting undervalues assets and unreasonably hurts the balance sheets of financial institutions.

    We get some help on understanding all of this from Floyd Norris, chief financial correspondent for the New York Times, and Simon Johnson, professor at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics.

    Floyd Norris, first, tell us a bit more about mark-to-market accounting, what it is, and what it's intended to do?

  • FLOYD NORRIS, New York Times:

    Mark-to-market accounting has been around for a long time. But a couple of years ago, they tweaked the rule to specify that they really had to pay attention to markets.

    That greatly offended the banks when the prices began to fall, and they had to take big write-offs. They think that the asset prices now are far lower than they will turn out to be worth when we eventually get out of this economic slump. On the other hand, they've not been willing to buy the assets at anything like the prices they think they're worth.

    They went to Congress. They put a lot of pressure on Congress. Congress threatened the Financial Accounting Standards Board, which sets the accounting rules, basically with putting them out of business, and the FASB basically gave in today.

    They adopted a rule that pretty much does what the banks want, but they did throw in a sop to angry investors who felt it was going to hurt them to have the banks no longer reveal market values. And they're requiring more disclosures.

  • JEFFREY BROWN:

    All right.

  • FLOYD NORRIS:

    How much that will help, we don't know.

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