Bernanke: Abandoning fair value would harm markets
WASHINGTON, Sept 23 (Reuters) - Suspending rules that require financial companies to value assets at current market prices would only further erode investor confidence, Federal Reserve Chairman Ben Bernanke said on Tuesday.
Mark-to-market accounting, also known as fair value accounting, has been maligned by the financial industry for forcing banks and others to post stunning write-downs as markets for their mortgage-related securities have dried up.
Bernanke said banks want to abandon fair value accounting standards and instead use their own estimates of hold-to-maturity prices for these assets, but warned such estimates would be unreliable.
"Doing this would only hurt investor confidence because nobody knows what the true hold-to-maturity price is," Bernanke said during remarks to the Senate Banking Committee.
U.S. Securities and Exchange Commission Chairman Christopher Cox would not say at the hearing on Tuesday whether the agency would consider a temporary suspension of fair value accounting but said regulators plan to provide "timely guidance."
Mark-to-market rules, which force banks to figure out the market values of their assets each quarter, took effect last November, though some banks adopted them earlier.
Bernanke said the U.S. Treasury's proposed $700 billion plan to buy distressed assets from U.S. financial companies would give a more reliable price for these securities, thereby attracting private capital.
"Private capital is unwilling to come in because of uncertainty about the value of institutions and because of the prospect of more writedowns," Bernanke said.
The Treasury has said one option would be to buy these illiquid assets using reverse auctions, in which financial firms bid the lowest price they will accept from the government.
Bernanke said the sales would give banks a basis for valuing those assets at amounts higher than the fire-sale prices they currently face.
MARK TO NO MARKET
But members of the banking industry are still pushing for relief from fair value accounting standards. They say it's crimping the industry, making firms unattractive to both private capital and to each other, preventing consolidation in the weakened industry.
The American Banking Association sent a letter to the U.S. Securities and Exchange Commission on Tuesday, asking regulators to provide immediate guidance that intrinsic value or economic value are appropriate proxies for fair value.
Melissa Netram, director of regulatory and securities affairs for the Financial Services Roundtable, said the group has been repeatedly talking to lawmakers and the SEC about the inadequacies of mark-to-market accounting.
The group says firms should be able to use alternative definitions of fair value that focus on the value to the investor if the security does not require immediate sale. Continued...
