The Financial Accounting Standards Board (FASB) is in the process of making banks very unhappy. In a complete reversal from their revised policy released in April, it is considering vastly tightening mark-to-market requirements to include virtually all securities on a bank’s balance sheet. Yes, it even wants the very, very illiquid stuff marked-to-market.
Here’s a blurb from FASB’s July 15th board meeting:
The Board agreed to propose that all financial instruments will be presented on the balance sheet at fair value with changes in value recognized in net income or other comprehensive income with an optional exception for own debt in certain circumstances, which will be measured at amortized cost.
Mark to market you may recall was tossed out the regulatory window last spring as part of the effort to save Wall Street and money center banks that current earnings would indicate did not truly need saving. Cooler heads at the accounting brain trust appear to agree.
Making banks mark some of their ‘assets’ to market will be a considerable task as there may be no clear value to a counter party’s position in a credit default swap or other derivative. Illiquid instruments may have widely varying market value depending on which trader you talk to. Illiquid markets trade on bid and offer with wide spreads which can be highly volatile.
Nonetheless, it will be informative for investors to have a more realistic idea of what the enterprise is worth in a given reporting period. Earnings will become more volatile, making stocks more volatile, all arguments you will hear against reinstituting mark to market. There is no law in economics or investing that says we must have stability and continuity in price.
Transparency is critical to discovering value, which is to say price in market terms. So FASB is right to do it, though the result may well be messy and result in a substantial drop in bank valuations.
