Bankers Urge Mark-to-Market Changes

The American Bankers Association has sent a letter to the FASB calling for changes to fair value rules.
Publish date:

The American Bankers Association urged the Financial Accounting Standards Board to make changes to fair value, or mark-to-market, accounting rules when its board meets this week, arguing that the accounting rules for banking institutions often provide misleading information on financial statements.

In a statement on the FASB proposal to alter the statement 157 on mark-to-market rules, the ABA argued that is critical to make immediate improvements to financial reporting.

Many financial institutions have long complained about statement 157, which was implemented in 2007 to change the definition of fair value -- the measure of the worth of an asset on a company's books -- and the methods used to measure fair value.

The mark-to-market rules have led to assets being priced well below their real value, making it impossible for banks to purge toxic assets from their books at anything but fire-sale prices.

Others argue that mark-to-market rules have certain advantages, such as accurately revealing the extent of problem assets and the deteriorating financial condition of institutions.

In its letter to the FASB, the ABA said that mark-to-market rules should not be suspended, saying they can indeed be very useful. "However, the method to determine

mark-to-market should be improved," the ABA said.

The FASB will consider proposals on Thursday and how they relate to how financial companies like


(C) - Get Report


Bank of America

(BAC) - Get Report

are required to take writedowns on impaired assets, and how companies can determine whether a market is not active and a transaction is not distressed.

Donna Fisher, a senior vice president in charge of tax, accounting and financial management with the ABA, wrote in the letter to the FASB's board that clarifications are needed to avoid continued confusion.

"We reiterate that normally inactive markets operate very differently from abnormally inactive or dislocated markets," Fisher wrote. "It is a significant step in the right direction in helping preparers and their auditors understand the concepts for estimating fair value in illiquid markets."

The ABA made a few recommendations to the FASB, saying that guidance is needed on the use of discount rates and risk premiums. Additionally, Fisher said that banks wants clarity with regard to so-called inactive markets, stating that the differentiation between a normally inactive market and a dislocated market "is essential in order to properly evaluate bid price quotes."

The ABA also recommended that the FASB change the definition of an orderly transaction to extend beyond one that would reflect all risks of the asset, including a reasonable risk premium for bearing uncertainty that would be considered by willing buyers and sellers in pricing the asset in a normal transaction.

Fisher recommends adding the caveat that the transaction occur in a normally active and functioning market. "Inserting such wording will reduce the confusion that arises during a dislocated market because of risk premiums required by certain market participants," she wrote.

The ABA said in a separate letter to the FASB that it is critical to make immediate improvements to "other than temporary impairments."

In many cases, banks are required to mark to market distressed debt securities and record losses, even if they do not intend to sell, and those losses on fully performing securities are often recorded permanently in earnings as other than temporary impairments.

"In other words, banking institutions must record, permanently in earnings, the market's view of losses, which often has no relationship to losses that are expected to occur," Fisher wrote.

The ABA said that other than temporary impairments for held-to-maturity securities should be based on credit losses rather than mark-to-market losses. "Recording non-credit losses in other comprehensive income for an HTM debt security, only to accrete that loss back to the security over time, is illogical and confusing," the ABA said.

Fisher recommended in her letter that the FASB should make the effective date in the second quarter, with earlier adoption permitted. Her argument was that certain institutions that will find implementation to be nearly impossible for the first quarter.

The proposals on mark-to-market are currently open to a 15-day comment period ending Wednesday, April 1.