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It is unwise to put the boot in when you do not have a leg to stand on. Yet that is what a tarnished banking industry risks with its critique of fair value accounting. The Institute of International Finance, an industry body, notes marking-to-market has “generally proven highly valuable”, but wants to amend rules in the medium term. The IIF argues that marking-to-market can create a downward spiral in asset prices. It proposes that, in “disrupted markets”, banks be allowed to value instruments using their own models or book value. It also wants lenders to have the flexibility to move assets from trading books onto banking books, where mark-to-market rarely applies.
However diplomatically couched, the proposals are unedifying. After precipitating a crisis and then borrowing large amounts of public money, it takes an audacious industry to cast accounting as
a villain. Banks did not complain when dodgy assets were going up. The 20 western institutions on the IIF board include most of the biggest losers from the crisis. Five have been forced into emergency equity raising, sometimes after being in deep denial.
Yet the proposal’s real weakness is in its logic, not its tone-deafness. The IIF wants “stable valuations” that “increase market confidence”. This
is not the purpose of accounting standards. Even if market prices have overshot (the Bank of England reckons aggregate subprime securities are worth about 80 per cent of par, versus a market value of about 60 per cent), relying on banks’ interpretations is worse. A generous view of the credit crisis is that banks lacked the competence to value assets accurately. A critical view is they chose not to. If anything, banks’ influence over their own disclosures, in particular Basel II risk weightings, should probably be lowered further.
There is a strong case that the crisis has been a triumph for fair value accounting. Within a year, the detritus created by systematic bad lending is being addressed, faulty managers are being removed and banks are beginning to restore their capital. Mark-to-market is part of the cure, not the disease.
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