After months of complaint from investors and bankers from all over, the Financial Accounting Standards Board voted and changed the guidelines to mark to market accounting. The new rules will be more relaxed in terms of valuing assets, and is believed to help banks’ balance sheets.
Under the old rules, all financial institutions must mark assets according to fair market value. Therefore, even if they have no intention to sell anything, they must take writedowns on assets that keep losing value, hurting reported earnings and capital. This in turn require banks to need additional capital because regulartory rules require banks to keep adaquate reserves for potential downturns. Many believed that this amplified the financial crisis because as toxic assets are sold at fire sale prices (since no one wanted them), anything that is remotely close to those assets were being unfairly punished, and therefore unnecessarily written down by the banks.
With the new rule, institutions can assert judgement and exclude the fire sale transactions, and mark all assets according to value in an orderly sale. Some argue that this lacks transparency, and while it may make banks’ balance sheets look “prettier”, it doesn’t make them “healthier”.
It’s almost impossible to tell with any degree of certainty whether it will help or hurt as a whole, but at least the stock market is liking the changes in the short term.
We shall see long term whether changes to mark to market is a good or not.