FSA chief says mark to market must be debated

Regulators must examine mark to market accounting as part of a fundamental debate on the setting of banks’ capital requirements, the chairman of the Financial Services Authority has said.

Lord Turner told the Financial Times that the debate was required and that alongside issues such as bonus structures, the transfer of risk and the regulation of liquidity and capital, mark to market accounting must be considered.

However, the interview did not elaborate on how a debate on mark to market, or fair value, accounting would be managed. Neither did it hint at whether recent steps taken by the International Accounting Standards Board, and endorsed by the European Commission’s Council of Ministers, to allow the reclassification of some financial instruments so they are not subject to a fair value calculation were adequate.

If the FSA does undertake a review of mark to market it is likely to come at the issue from the point of view of capital adequacy requirements for banks, quiet a different set of interests from those behind the work of the IASB in setting accounting standards.

The SEC announced yesterday that it was to stage round table discussions this month to explore the effects of mark to market accounting, whether it changes the behaviour of users and whether it remains useful to investors and regulators.

There has been immense pressure in the US, UK and Europe to suspend mark to market amid claims that it has exacerbated the current financial crisis and unfairly undermined the balance sheets of financial institutions.

Investors and regulators have mostly stood by the rule.