Banks want accounting rules relaxed
FT is reporting that banks are pressing their case to have fair-value accounting rules relaxed.
The world’s leading banks have stepped up pressure to relax controversial accounting rules with a new plan aimed at breaking the “downward spiral” of huge writedowns, emergency fundraisings and fire-sales of assets.The proposals on “fair value” accounting by the Institute of International Finance, an alliance of 300-plus companies chaired by Josef Ackermann, Deutsche Bank’s chairman, would enable financial companies to cushion the blow of financial crises by valuing illiquid assets using historical, rather than market, prices.
Of course banks would prefer to carry the value of their illiquid assets at “historical” rather than “market” prices. If they’re allowed to do so, they can carry billions in paper losses without actually writing down any assets.
Kudos to the various “accounting standard-setters” who are resisting this pressure. Allowing banks to carry toxic trash on their balance sheet at values they determine themselves threatens to turn the American and European financial sector into Japan circa 1995. Bank writedowns, and even some failures, may be painful in the short-run. But the long-run health of the economy depends on efficient capital formation. It depends on creative destruction to eliminate economic rot.