U.S. regulator opposes suspending mark-to-market

WASHINGTON Wed Mar 11, 2009 6:59pm EDT

WASHINGTON (Reuters) - The regulator for some of the biggest U.S. banks expressed opposition on Wednesday to suspending mark-to-market accounting rules to value bank assets, but said some tweaks might be needed.

Kevin Bailey, deputy comptroller of the currency, said in prepared testimony for a congressional hearing on Thursday that the accounting rules, also called fair value, provides the best estimate of the value of many types of financial instruments as of the measurement date.

"While additional steps can and should be taken to enhance existing standards, the OCC believes that it is inappropriate to suspend current fair value measurement," Bailey said.

Fair value rules have led to huge write-downs of mortgage- related securities and other instruments at banks at a time when markets are thin or nonexistent for some assets.

Write-downs can reduce earnings and affect regulatory capital.

Banks are seeking a modification or a suspension of fair value rules, while the U.S. government crafts a plan to absorb those toxic assets off the balance sheets.

The difficulty is valuing those assets and some banks could become insolvent if they are forced to mark those assets down so much when there is no buyer for the financial instruments.

Fair value rules apply to equity and debt investments for trading and available for sale. Debt instruments that are held to maturity are accounted using amortization rules.

While opposed to suspending the rules, the agency supports additional guidance from the Securities and Exchange Commission and the Financial Accounting Standards Board, the standard setter.

"Additional measures should be taken to improve the application of existing fair value requirements," Bailey said.

Bailey, whose agency regulates Bank of America Corp (BAC.N), Citibank Inc (C.N) and JPMorgan Chase & Co (JPM.N), said valuation in illiquid markets is "exceeding" difficult.

"It is, therefore, incumbent on supervisors and standard setters to continue efforts to enhance current practices through additional guidance," Bailey added.

Bailey said as of December 31, 2008, about 25 percent of OCC-regulated banks' assets were accounted for or subject to fair value measurement.

When regulators assess rules based on generally accepted accounting principles, he said, banking agencies should continue to consider the need for risk sensitivity in regulatory capital while seeking to limit temporary volatility.

(Editing by Andre Grenon, Bernard Orr)