Ease accounting rules for banks? Let’s look a little closer
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As the House convenes a hearing today on the purported damage that ‘mark-to-market’ accounting is doing to the financial system, columnist David Reilly of Bloomberg News asserts that the banking industry’s protests are overwrought:
‘Forget the drum pounding, which keeps growing louder, about how banks are forced by irrational markets to mark down the value of all their assets. Figures provided by banks themselves in their 2008 filings show otherwise. ‘Of the $8.46 trillion in assets held by the 12 largest banks in the KBW Bank Index, only 29% is marked to market prices, according to my analysis of company data. General Electric Co., meanwhile, said last week that just 2% of assets were marked to market at its General Electric Capital Corp. subsidiary, which is similar in size to the sixth-biggest U.S. bank.’
The mark-to-market fight is over accounting rules that force banks to write-down the value of mortgage-related securities to levels the banks say are unrealistically grim -- in turn, ravaging their balance sheets.
But Reilly notes that the vast majority of bank assets -- mostly consumer and business loans -- ‘are held at their original cost, minus a reserve that banks create for potential future losses. Their value doesn’t fall in lockstep with drops in market prices.
‘Yet these loans still produce losses, thanks to the housing meltdown and recession. In fact, bank losses on unmarked loans are typically bigger than mark-to-market losses on securities like bonds backed by mortgages.’
So what would be accomplished by easing accounting rules for mortgage securities? It wouldn’t ‘staunch that flow of red ink’ from banks’ rotting loans, Reilly notes:
‘Worse, it would make investors even more distrustful of bank balance sheets. These investors already believe banks are underestimating just how bad losses will be on their unmarked loans. ‘So it’s hard to swallow the notion that markets have been hobbled because of mark-to-market accounting. Or that markets would miraculously recover if we eliminated these rules and relied instead on bankers’ judgment of what assets will ultimately be worth.’
-- Tom Petruno