FASB’s mark-to-mayhem

Tremble US financial institutions, for FASB is about to fair value your assets.

The US Financial Accounting Standards Board has published a proposal that would require banks to report the fair value of most of the loans on their books, in other words, do the dreaded mark-to-market. At the moment they can hold a hefty portion of them at amortised cost.

Jason Goldberg over at Barclays Capital has a handy summary of the proposal:

But how much might banks really be impacted?

After suspending mark-to-market accounting in March of last year, FASB tried to partially make up for the loss of transparency by requiring banks to disclose the fair value of their financial instruments every quarter instead of just annually.

They could use their own estimates for this, but had to include their methods and the “significant assumptions” that lead them to arrive at their numbers. Those disclosures mean we can already partially see some of the impact the new FASB rules might have on banks.

Barclays has gathered the data:

So it looks like the average bank’s loan portfolio is 1 per cent below its carrying value. That is, the estimated market value is one per cent below the value using FASB’s current practices. But the range of the discrepencies between the two values is fairly wide — between +2 per cent and -15 per cent.

With divergences like those, as Barclays’ Goldberg puts it:

Running these figures through the income statement could create significant volatility.

Therein lies the nub of the mark-to-market debate.

Valuing assets at their market prices does a helluva lot for transparency, but it does mean there’s a tendency for them to swing wildly along with markets. FASB’s move is also somewhat odd considering its international counterpart — IASB — moved in an opposite fair value direction last year.

Anyway, cue the predictable response from the American Bankers’ Association:

If implemented, the proposal would greatly undermine the availability of credit by making it difficult to make many long-term loans, the value of which, even if performing perfectly, would likely be reduced on the day a loan is made.

As a curio, before the financial crisis, banks’ fair value numbers were generally above book value. At that point no one really seemed to care about the discrepency, or mark-to-market, for that matter.

How times change.

FASB will be accepting public comments on its proposal until Sept. 30.

Related links:
Fair value foresight and equity destruction - FT Alphaville
Split on accounting standards set to widen – FT
The IASB does fair value – FT Alphaville

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