FASB Looks to Expand Mark-to-Market Rules

The Wall Street Journal reported today that the Financial Accounting Standards Board ("FASB") is looking to expand requirements for mark-to-market accounting at banks.  If successful, the FASB will require banks to report the market values of loans rather than the historical cost.  This change could have a dramatic impact on the balance sheets and income statements for many financial institutions.  Here is some additional perspective from the WSJ.

Banks generally loathe mark-to-market rules, which rely on what they feel are too-often irrational market prices. The market value of some loans did fall excessively in the depths of the crisis. And many bankers, and bank regulators, believe the rules worsened the financial crisis.

But that argument ignores the fact that banks clearly didn't pay enough heed of market values in the run up to the crisis, and their own estimates of potential losses were woefully inadequate. This left bank balance sheets, and investors, unprepared for the credit crunch. If banks had focused on market values as well as internal models, many may have acted sooner to raise equity.

If these new rules are adopted, then the divide between the winners and losers among financial institutions will widen precipitously.  Investors and bankers alike will be keeping a close eye on this potential development.