WASHINGTON - The U.S. accounting standard setting body is still collecting comments on its proposal to apply fair value accounting to all financial instruments, and Federal reserve Chairman Ben Bernanke said during his Financial Crisis Inquiry Commission hearing Thursday that it is not the best idea for long-term loans.
That is not to say fair value -- also known as mark-to-market -- should be eliminated, he said.
"I think we should do our best to get appropriate market values of assets" when they don't have a market price, Bernanke said. "Now this is a somewhat different issue (when) you're dealing with long-term credit in the banking book."
"I'm in favor of accurate accounting. I think that there are sometimes problems when markets are very illiquid. The FASB tried to move in the direction of clarifying how to deal with so-called level 3 assets in illiquid markets."
"But I'm also very cautious about applying mark-to-market accounting to the long-term loans," he said.
In fact, "I think that mark-to-market accounting at times increased the procyclicality of the system," he said, particularly referring to periods of illiquid markets making asset valuation harder and when there is no secondary market and appropriate valuation requires a model or some assumptions.
As to how MTM influenced the financial crisis, he said, "I think it exacerbated it, somewhat." With the nature of financial markets being that asset prices move and down and then crashed, "We don't want to sacrifice accurate valuations to eliminate that issue."
Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See
