RegulationAccounting StandardsKaletsky: set limits to mark-to-market accounting

Kaletsky: set limits to mark-to-market accounting

Times' economic commentator says rules would have made most banks through history technically insolvent

Limits must be set to the ‘absurdity’ or mark-to-market accounting, respected
economic commentator Anatole Kaletsky has said.

In a column in The Times, Kaletsky says that suggestions that US mortgage
giant Fannie Mae was ‘technically insolvent’ only meant something in that ‘every
leading bank in the world would have been technically insolvent by today’s
accounting standards throughout the 1980s.’

Banks will be able to continue lending despite the problems, he says:
‘[Today’s problems lie] in the dogmatic belief that a bank’s ability to operate
must depend on the values that wildly fluctuating markets assign to the assets
and liabilities on its balance sheet.’

For a bank to be solvent, the rules mean they ought to be able to liquidate
assets and liabilities overnight and still have money left for shareholders,
Kaletsky says.

But, he says, ‘the whole point of a bank is to exchange short-term, liquid,
fixed-value liabilities for long-term, illiquid assets whose value is hard to
gauge.’

Further Reading:

Read
Kaletsky’s column: We have a financial problem, not an economic crisis

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