Mark-to-market accounting — a failed policy that was terminated by the Roosevelt Administration in 1938 because it was inhibiting bank lending — was revived by the Securities and Exchange Commission and the Financial Accounting Standards Board in the 1990s over strong objections from the Fed, FDIC and Treasury.
The MTM policy senselessly destroyed some $500 billion of capital in our financial system when the markets collapsed in 2008. This destroyed some $4 trillion of bank lending capacity and was a major contributor to the financial panic and ensuing economic collapse.
The FASB, almost inexplicably, proposed last year to EXPAND mark-to-market accounting to cover all bank loans. This would have essentially shut down lending except for short-term lending to businesses with impeccable credit ratings.
See the press release below. The FASB is apparently abandoning its plan to expand mark-to-market accounting. This is an important first step improving US accounting as it relates to financial institutions.
ABA WELCOMES FASB REVERSAL ON FAIR VALUE EXPANSION
Step in the right direction but still more work to be done
By Gov. Frank Keating, ABA president and CEO
“The American Bankers Association welcomes the Financial Accounting Standards Board’s change in course on mark-to-market accounting. Along with banking investment analysts and other stakeholders, ABA has worked tirelessly to educate accounting rule-makers about the destructive implications of expanding mark-to-market accounting to all financial instruments, including loans.
“The FASB unanimously approved an accounting model for financial instruments this morning that reverses its proposal to record all financial instruments at fair value. This tentative decision is expected to result in a final standard later this year.
“Today’s shift recognizes investor concerns that a company’s business model should be a key factor in measuring financial instruments. While mark-to-market can be very useful for a business that trades financial instruments, the most appropriate accounting measure for a loan portfolio is the loan balance minus impairment.
“FASB’s move today will greatly increase the likelihood of convergence with International Financial Reporting Standards. This is a turn in the right direction and a welcome departure from FASB’s call to expand fair value accounting to nearly all financial instruments.
“While we recognize and applaud this direction, there is still more work to be done. We are concerned that FASB may expand mark-to-market to many debt securities that are not traded, but are held to maturity. This would introduce unnecessary volatility to bank capital levels and would fail to reflect how banks are managed.
“It is our hope that FASB will work expeditiously to clarify these rules and better align them with how entities manage their businesses.”
The American Bankers Association represents banks of all sizes and charters and is the voice for the nation’s $13 trillion banking industry and its two million employees. Learn more at aba.com.