New fair value rules would need ‘symmetry’ says expert

An upgraded version of fair value accounting to counter the effect of market
crises on bank assets is still pro-cyclical, a risk expert said today.

Responding to suggestions by French accounting
experts Jean-Fran├žois Lepetit, Etienne Boris and Didier Marteau

for an ‘intrinsic’ measurement of assets that have been discounted in crises,
Avinash Persaud warned that creating a different measurement during bad times
would encourage excess in the good times.

‘Offering accounting forbearance to banks when asset prices plummet, but not
in the boom when roaring prices contribute to excessive lending, will strengthen
the incentives for excess that lead to crises in the first place,’ said the
emeritus professor, Gresham College and trustee, Global Association of Risk

Persuad said in the FT’s letters page that adjustments to mark-to-market
accounting could only be made if they could be downgraded in good times.

‘To avoid succumbing to political pressure, the accounting regulator would
need to determine when to adjust mark-to-market accounting.’

Further reading:

French experts explain fair value
during a crisis

Related reading

Fiona Westwood of Smith and Williamson.