March 11, 2009 / 5:00 PM / 11 years ago

U.S. nears mark-to-market accounting guidance

WASHINGTON (Reuters) - U.S. accounting rulemakers and regulators said they were pushing ahead with new guidance on mark-to-market accounting that has forced banks to write down billions of dollars in assets in the financial crisis.

Aimed at giving an accurate view of financial companies’ books, the rules have led to huge writedowns of mortgage-related securities and other instruments at a time when markets are thin or nonexistent for some assets.

Financial Accounting Standards Board member Lawrence Smith said on Wednesday that the accounting standards setter would include guidance on whether a market is active or inactive and whether a transaction is distressed.

Smith added that FASB would issue the guidance “in the real short term” but told a U.S. Chamber of Commerce conference in Washington that criticism of mark-to-market was overblown.

Meanwhile, Securities and Exchange Commission Chairman Mary Schapiro told Congress she was keeping the pressure on FASB.

“FASB has committed to us that the guidance will be out in the second quarter,” Schapiro told a House Appropriations subcommittee hearing on the agency’s annual budget needs. “We are pushing them very very hard to do that.”

In September last year, the SEC reminded financial firms that they did not have to use fire-sale prices when evaluating hard-to-price assets.

The mark-to-market accounting rule is defended by investor advocates but the banking industry has pleaded for a suspension or modification of the rule.

The SEC and FASB oppose suspension or elimination of the rule, saying this would hurt the quality and transparency of financial reporting and further diminish investor confidence in the markets.

Federal Reserve Chairman Ben Bernanke said on Tuesday he was against suspension but called for improvements, saying the rule tended to reinforce the highs and lows of the financial system.

BANK REGULATION

In prepared testimony for a Congressional hearing Thursday, the Office of the Comptroller of the Currency also said it believed it was inappropriate to suspend the accounting rule.

Writedowns of illiquid assets have weakened banks’ balance sheets, which in turn requires banks to beef up their capital levels to comply with regulatory standards.

FASB Chairman Robert Herz, in testimony posted on the committee’s website, said bank regulators’ decisions on capital adequacy and responses to capital impairments cannot, and should not, be driven solely or mechanically from balance sheet results.

“Their role is different from ours, and our standards are not specifically designed to meet their objectives,” Herz told the House Financial Services capital markets subcommittee.

Regulators and lawmakers have criticized the accounting rule for its “pro-cyclical nature,” reinforcing the swings of the economic cycle.

Herz said he believed these concerns were more effectively addressed through regulatory mechanisms and via fiscal and monetary policy rather than “trying to suppress or alter the financial information reported to investors and capital markets.”

FASB’s Smith said the rule was not as prominent in valuing assets as some believed. “It seems like people are not exercising as much judgment as they could have.”

JPMorgan Chase & Co (JPM.N) Chief Executive Jamie Dimon, speaking at the same conference, said accounting standards may need to reflect economic conditions.

Dozens of industry groups and federal home loan banks expressed their concerns to top Republican and Democratic lawmakers in a letter sent on Monday.

Groups such as the Chamber of Commerce and the American Bankers Association said they could not wait until mid-year or the end of the year for changes to the rule.

Additional reporting by John Poirier and Julie Vorman; Editing by Tim Dobbyn

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