It’s worth noting, as the FT has done this Monday morning, this bit from the Fed’s Friday release of its banking stress test methodology:New FASB guidance on fair value measurements and impairments was issued on April 9, 2009, after the commencement of the SCAP. For the baseline scenario supervisors considered firms’ resubmissions that incorporated the new guidance. However, for the more adverse scenario, in order to reflect greater uncertainty about realizable losses in stressful conditions, supervisors did not incorporate the new FASB guidance.
The US’s Financial Accounting Standards Board (FASB) voted last month to alter the rules on valuing illiquid assets, thereby softening mark-to-market accounting rules. FAS 157-e allows banks to gauge whether prices for their assets were made during an inactive or distressed market. If a market is found to have been distressed the banks won’t have to use the depressed prices to value the assets on their books. Instead they can use their own models to value the assets, in the same way they do with Level 3 assets. As the FT puts it:
The decision means the US authorities are now maintaining two approaches to valuing securities – a hardline approach when it comes to establishing how much capital banks need to hold pre-emptively against risks, but a softer approach when it comes to reporting losses relating to the same risks as they materialise.
This two-track approach could create an additional buffer between the amount of capital lined up now and the way banks report the erosion of that capital.
In other words, banks will be recapitalised according to needs based on (terrible) market prices, and allowed to report profits and losses based on their own (better) estimations of the value of their assets.
Related links:
Dual stance on valuing bank securities – FT
M2M change = time to buy banks? – FT Alphaville