Banks scored a win yesterday as the Federal Accounting Standards Board backed off on attempts to force them to calculate their loan values using market values.
The proposed form of accounting, known as mark-to-market, or fair value accounting, would make banks calculate the value of their assets based on the current market value, rather than by with the adjusted historical costs they are accustomed to using.
The FAFSB's retreat is a victory for banks who have lobbied hard against the proposed fair value accounting system, in which asset values are subject to the movements of the market, which they claimed would curb lending and hurt economic recovery.
"Today's shift recognizes investor concerns that a company's business model should be a key factor in measuring financial instruments," said Frank Keating, president of the American Bankers Association, in a statement, "While mark-to-market can be very useful for a business that trades financial instruments, the most appropriate accounting measure for a loan portfolio is the loan balance minus impairment."
Some indict mark to market accounting standards for contributing to the recent financial crisis by forcing banks to lower the value of assets as volatile markets spiraled down, exacerbating the situation and driving huge write-downs.
Instead, banks will continue to report the loans and deposits on their balance sheets at cost-based methods where the value is derived from the original cost with some devaluation for the possibility of losses, while continuing mark to market for traded securities.