People might have assumed that with the US stress tests out of the way and the banking sector on both sides of the Atlantic seemingly on the mend, sector lobbyists might have relaxed in their attempts to paper over problems with accounting rule changes.
Not so. Consider this statement:
Although our associations have a number of concerns about MTM, the most important improvement that we believe still needs to be made is the definition of “fair value.” The definition of fair value, which was reaffirmed by FASB in its recent Staff Position, continues to mislead users of financial statements. In practice, the application of the FASB’s rule defining fair value as “exit price” gives no consideration to what price a seller is willing to accept, and therefore, results in a downward bias in reported values.
That’s from a letter just dispatched to the US House Financial Services Committee by the American Bankers Association, the American Council of Life Insurance, the American Insurance Association, the Council of Federal Home Loan Banks, and The Financial Services Roundtable.
A fresh and furious attempt is underway to press the Financial Accounting Standards Board to adopt a new core definition for mark-to-market accounting. Here it is:
Fair value should be defined as a “willing buyer and willing seller” in an arm’s length transaction that is not a forced sale.
Pretty snappy, eh? If the seller decides that the price offered in the market does not reflect the real economic value of the underlying assets, then the market price must be wrong.
And what happens if the FASB does not bend on MTM? Well, consumers will suffer of course.
Simply put, the result of such a requirement would be that many financial institutions would need to curtail their lending activities due to the risk of volatility (from recording immediate MTM gains and losses). Such a risk is expected to drive up the cost of loans to consumers for the increased financial reporting risk assumed. We believe that the current efforts to require that all financial instruments be marked to market should be abandoned.
Related links:
Banks Lobby to Game PPIP – Calculated Risk