New Accounting Rules for Banks
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Mortgage lending banks have had problems lately with toxic assets on their balance sheets. Complex derivatives and credit default swaps make up a large amount of “assets” causing problems on the balance sheets of banks. After leveraging heavily to invest in these opaque vehicles that hardly anyone knew how to properly rate or value, banks are in trouble. Even more troubling is the fact that investors don’t want to touch these assets. In terms of market value, they’re basically worthless. This means that they cause serious damage to bank balance sheets, making it difficult for them to overcome losses. In order to “fix” this problem, the U.S. Financial Accounting Standards Boards has created some new rules to govern the way the value of these assets are figured.
Banks can value their own toxic assets
The new rules allow banks to use their own methods to determine the value of their illiquid assets. Rather than relying on market value, banks can come up with their own formulas to determine the worth of these securities. This will help bank balance sheets because, obviously, banks will rush to place higher values on the securities than the market does. The new rules allow banks to present themselves as — perhaps — healthier than they really are.
I’m not sure this is such a good idea. After all, it basically allows banks and mortgage lenders to continue doing what they have been. Only this time they can decide how much something is worth, rather than the market. Mortgage lenders can take all of these risky mortgage-backed securities and essentially make up any value that suits them and their balance sheets. It means that it doesn’t really matter whether or or not we learn from the vicious cycle that got us into this mess; banks can just make stuff up to give the perception that they are improving in financial health — even though nothing has actually changed.
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