The Financial Accounting Standards Board (FASB) has proposed stricter rules that would require banks and other lenders to price their loans at their current market value.
The goal is "greater transparency in financial statements," FASB Chairman Robert Herz said in a news release.
The mark-to-market rules would make banks' books more closely reflect the banks' current financial condition by accounting for losses more promptly, helping investors and the capital markets and possibly helping avoid another financial meltdown, according to FASB.
But bankers have long supported the business model approach, where mark-to-market accounting is used for assets that are actively traded and credit impairment is used for loans that are not traded. If a company’s business model is not based on mark-to-market, then using it as the basis of accounting can be misleading to users of financial statements.
“FASB’s proposal for mark-to-market accounting presents significant problems, not only for banks, but also the general economy," said Edward Yingling, president and CEO at 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."
Yingling said that the mark-to-market principles in the proposal also conflict with the recommendations of the G-20 and the Basel Committee, and the proposal is also dramatically different from the new International Accounting Standards Board rules, which are based on an entity’s business model. This, he said, puts into peril the potential for convergence of international accounting principles.
“When mark-to-market is misapplied, it increases pro-cyclicality in the financial system – an important concern and focus of world leaders," he said. "Given the role that mark-to-market has played in exacerbating the current economic crisis, it is hard to understand the rationale for expanding it without regard to the business model.”
The mark-to-market rules proposed by the FASB wouldn't begin to take effect until 2013.