Mark-to-Market Accounting Principles
Background
Inflexible accounting policies have contributed directly to the current financial crisis by requiring long-term assets to be marked to the market’s current going rate – otherwise known as mark-to-market. During the financial downturn, their values of certain long term assets reduced very rapidly due to the lack of demand. Banks were forced to artificially write down values on these assets – even if there was no intention to sell them in the short term. This artificial devaluing of the portfolio forced banks to increase capital holdings, taking money away from what could be lent to customers. This process directly led to the demise of some financial companies and weakened our entire system.
Future Threats
FASB is proposing to expand mark-to-market accounting principles to apply even to individual loans. This objectionable practice would inject even more volatility into a bank’s risk management plan, tying up more funds for capital and leaving less for businesses and consumers during the downturns when (as we’ve seen) lending is needed the most. Without any oversight committee, changing the path of FASB is difficult.
Perlmutter Amendment
On 11/19/09 Rep. Perlmutter offered an amendment that that would allow the new systemic risk regulator to consider the effect that any current or proposed accounting principles could have on our economy vitality.
The new systemic risk regulator is being created through the Financial Stability Improvement Act, which is still moving through the House. Previous drafts would have created a completely new oversight council that would have provided oversight of FASB for systemic risk purposes.
In relation to FASB's expansion of mark-to market principles, the creation of Perlmutter’s FSOC would be able to assess FASB’s proposed rule, and its systemic affects - and weigh in appropriately.
CBA’s Position: Highly Supportive
As stated by ABA, moving FASB oversight to the FSOC would ensure that insured depository assets are properly valued, protecting investors, depositors, and taxpayers. It also would ensure that accounting policy is factored into resolution and systemic risk decisions at a very high level.