IIF urges change to accounting rules to stem financial crisis
Wednesday, 19 November 2008
BEIJING, Nov 18 (Xinhua): The United States should consider changing the way it accounts for illiquid assets to help stem the financial crisis, a senior official of the banking group Institute of International Finance said (IIF) here yesterday.
"We all believe mark-to-market accounting is totally appropriate for tradable assets in a liquid market," IIF executive director Charles H Dallara told the news agency. "But in illiquid market, fair value accounting is problematic. It is perhaps exacerbating problems."
Many banks blame fair value accounting, also known as mark-to-market, which requires assets be valued at market prices, for billion of dollars in write-downs on mortgage assets in the subprime crisis.
But for illiquid mortgage assets, banks have to value assets at fire-sale prices in the market turmoil, but may not plan to sell the assets now and their value could grow in the future.
Europe has relaxed mark-to-market accounting to ease requirements for marking down investment to help banks have more healthy balance sheets.
"What the European Union has done is to moderate some effects of fair value accounting in illiquid market circumstances. This is what has not been done in the US and right now this is our problem," he said. "The EU's is a more pragmatic approach today. The US should ally for international accounting standards."
Dallara noted that the US also need to take a federal-framed strategy for restructuring mortgages and help borrowers unable to pay their mortgage.
He acknowledged that the US did not have an adequate strategy to stabilise foreclosures, which was the root cause of the financial crisis.
The US Treasury last week scrapped the original plan of using 700 billion US dollars to buy troubled assets to stabilise the financial market.
"We all believe mark-to-market accounting is totally appropriate for tradable assets in a liquid market," IIF executive director Charles H Dallara told the news agency. "But in illiquid market, fair value accounting is problematic. It is perhaps exacerbating problems."
Many banks blame fair value accounting, also known as mark-to-market, which requires assets be valued at market prices, for billion of dollars in write-downs on mortgage assets in the subprime crisis.
But for illiquid mortgage assets, banks have to value assets at fire-sale prices in the market turmoil, but may not plan to sell the assets now and their value could grow in the future.
Europe has relaxed mark-to-market accounting to ease requirements for marking down investment to help banks have more healthy balance sheets.
"What the European Union has done is to moderate some effects of fair value accounting in illiquid market circumstances. This is what has not been done in the US and right now this is our problem," he said. "The EU's is a more pragmatic approach today. The US should ally for international accounting standards."
Dallara noted that the US also need to take a federal-framed strategy for restructuring mortgages and help borrowers unable to pay their mortgage.
He acknowledged that the US did not have an adequate strategy to stabilise foreclosures, which was the root cause of the financial crisis.
The US Treasury last week scrapped the original plan of using 700 billion US dollars to buy troubled assets to stabilise the financial market.