Academic journal article ABA Banking Journal

Mark to Market: ABA Made a Difference

Academic journal article ABA Banking Journal

Mark to Market: ABA Made a Difference

Article excerpt

BIG BANKS. LITTLE BANKS. STOCK-owned and mutuals. Banks of every size and every charter united within ABA with one goal in mind--stop the drain on the banking system that the Financial Accounting Standards Board created with its mark-to-market rules.

The irony is that when the federal government began pouring money into some banks, FASB was draining it out the bottom. FASB's mark-to-market rule was forcing banks to write down the value of their assets when, thanks to infrequent or distressed sales, no true value actually existed.

ABA, which for years warned of the pro-cyclical nature of mark-to-market accounting, took the lead in successfully persuading Congress and others that FASB's rules were making matters worse.

It took months and months of hard work--months and months of persistence--including constant reminders in the media, testimony before Congress, and meetings with the regulators. But ABA and individual banks that joined the effort got the message across: FASB had to change its guidance.

When FASB finally got around to repairing the leaks that were draining capital from the banking system, it stopped short of fully fixing the rule for securities that are classified as "held to maturity." However, it did approve new guidance that will provide much needed clarification in estimating market values in illiquid markets. This guidance will allow banks and their auditors to use judgment when valuing illiquid assets, rather than forcing banks to mark assets to fire-sale prices.

FASB also improved the accounting for debt securities that are required to be classified as "impaired." Under the new guidance, impairment that is reflected in earnings will be more closely linked with actual credit losses--rather than market losses. This important change will likely result in higher earnings and tier-one capital for banks. …

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