Retreat on 'Marking To Market'
By MICHAEL RAPOPORT
Accounting rule makers, bowing to an intense lobbying campaign, took a key step Tuesday to reverse a controversial proposal that would have required banks to use market prices rather than cost in order to value the loans they hold on their balance sheets.
The debate over the proposal is the latest chapter in a pitched battle pitting investors who wanted better disclosure of the value of banks' assets against the banks themselves. Banks have argued against so-called fair-value accounting, saying market prices would have left them at the mercy of volatile markets and could have caused additional strain during the financial crisis.
The Financial Accounting Standards Board preliminary vote would allow banks to continue valuing many of their loans at amortized cost, an adjusted version of their original cost, as they do now. That backtracks on an FASB proposal last May to expand fair value to bank loans. The reversal is a victory for the banking industry, which says it would have hurt lending and unfairly reduce banks' book value. Supporters of the FASB fair-value proposal say it would have improved transparency and unmasked potential weakness at banks.
The FASB indicated the overwhelmingly negative reaction to its proposal from companies and investors played a large role in prompting the board to change its mind. The board received more than 2,800 comment letters on its fair-value proposal, most of them opposed to the move.
FASB changed direction on how to value loans because of "strong signals from the board's constituents," FASB Chairman Leslie Seidman said during a webcast Tuesday. She also noted that some loans—including those that banks trade actively instead of retaining in order to collect the payments on them—will have to be valued at market prices.
Advocates of fair-value accounting argue it is needed to make banks' true financial conditions clearer to investors. But critics say it has forced banks to take large, unwarranted write-downs on their assets when the market declined temporarily, and that it exacerbated the financial crisis as a result.
The move back to amortized cost is "not our preferred approach," said Sandra Peters of the CFA Institute, a financial analysts' group that had supported the fair-value proposal.
But the group still hopes to achieve that goal of greater company disclosure in the future. "We recognize that these changes take place over time," Ms. Peters said.
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