Volcker voices concerns about US fair-value proposal

US President Barack Obama’s chief economic adviser Paul Volcker has expressed fears the American fair-value proposal may be heading in the wrong direction, in an interview with Forbes.com last month.

The ageing former chairman of the US Federal Reserve, who now heads up the President’s Economic Recovery Advisory Board, is concerned the US accounting standard setter’s fair-value, or mark-to-market, rules, which are being reformed in the wake of the credit crisis, may be inferior to the international model.

“Well, I'm lost in some of the details, but my impression is just that (US Financial Accounting Standards Board) is much more toward insisting upon mark-to-market accounting in areas that I don't think it's appropriate,” Volcker told Forbes.

“My impression is the international people are pretty much going in the right direction. Your balance between that part of the financial books, that part of the commercial banking book that should not be automatically mark-to-market, distinct from parts that should be, where if you've got a trading book, should be mark-to-market.”

The Financial Accounting Standards Board (FASB) is exhibiting a full fair-value model which, if adopted, would force banks to value their loan books at their estimated market price.

The global standard setter, the International Accounting Standards Board (IASB), has adopted a mixed-measurement model which allows banks to measure loans at either fair value or cost, depending on whether loans are being traded or held to maturity.

The fair-value model ravaged banks balance sheets in the crisis, as asset prices plummeted in falling markets. Banks were forced to measure their loan-books at depressed market prices which obliterated much of their balance-sheet value.

The IASB and FASB hope to harmonise much of their two accounting codes by June 2011. The fair-value rule is proving a stumbling block, with each board adopting a different view on how to incorporate fair value.

Banks have railed against the FASB proposal which they feel will add unnecessary volatility to their balance sheet. The all-powerful American Banking Association has proven a particularly vocal critic of the standard which is currently out on exhibition.

Further Reading:

Transcript: Paul Volcker

FASB in midst of "religious war" on fair value