Mark-to-Market Definitions

The current definitions of Accounting and Regulatory rules that govern bank holdings of mortgage backed securities are causing unintended and unnecessary capital destruction in the banking system.

Is there any wonder that the billions poured into the banking system has caused no new lending and capital hoarding?  The cause of this bank credit lock up can be found in the answer to two questions.

The solution to the credit lock up is making rational, rules based decisions about these answers that exist in regulatory and accounting boundaries.

Banks and thrifts across the country are being hit with the Office of the Comptroller of the Currency (OCC) designation that some of their assets are being “classified” during the regulatory examination process. What does classified mean, and what are its impacts.

The accounting rules that force financial institutions to write down impaired assets to fair value only apply to securities under US accounting standards.  US accounting standards for loans and international accounting standards for securities only require impaired assets to be written down to the present value of the expected cash flow.  

US and international accounting standards are on a plan of convergence and much of what the FASB is working on today is making US accounting standards consistent with international accounting standards.   Thus. changing the fair value accounting rules for impaired securities is not a radical or complex change.  Instead it would simply speed up the process of converging US and international accounting standards and apply consistent rules across the balance sheet for all financial institutions. 

The US Government is throwing billions of our dollars to get financial institutions to lend money.   However, institutions won’t lend if they fear they’ll have to write down good, performing assets.   If you care about having available loans for mortgages, automobiles, student loans, and credit cards, you must care about this issue.   The very fabric of our economy is at stake.   Even if you do not personally use credit, the economic catastrophe caused by a continuing “credit lock-down” will cost many Americans their jobs.

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