ALL BUSINESS: What Are Bank Loan Values Worth?

RACHEL BECK

NEW YORK (AP) — It took the liquidation of Colonial Bank to reveal an ugly truth: the loans on its books were worth a third less than what the failed regional lender had declared them to be just weeks before.

It's an ominous sign about weaknesses that may be lurking in other banks' loan portfolios. Regulations give banks wide latitude about whether to recognize potential loan losses on their balance sheets, so they remain largely out of view.

This is exactly why many investors were up in arms when the Financial Accounting Standards Board, which sets U.S. accounting rules, seemingly buckled under pressure from Congress earlier this year. Its board backtracked from rules that forced banks to be more transparent about the true value of assets.

Bank lobbyists and their congressional backers argued that it was needlessly destructive, in times of market disruptions when few buyers are available, to require lenders to base the value of assets on what they could be sold for at that time, using what is known as mark-to-market accounting.

But those who support mark-to-market counter that present rules allow banks to just delay their day of reckoning by not being upfront about their assets' value.