In an earlier post I mentioned possible market catalysts. One of the main catalysts mentioned was a change to mark to market accounting. It looks like that is happening today.
FASB is set to approve new rules for mark-to-market accounting. This will give US banks more realistic models to use when valuing their assets.
The mark to market change will give banks flexibility in their asset valuation which will affect ratios within the bank. If a market is found to be distressed, companies won’t have to use the depressed prices to value the assets on their books. Financial institutions can start using their own models to value their assets. Wow. A lot of trust there, but the current rule throws the good down with the bad.
Here is a rather exaggerated example of the current rule. If you live in a neighborhood of $300,000 homes and there is a home down the street that was run down and hadn’t been maintained for 10 years, the value would not be equal to your well kept $300k home. To top it off, the owners had 20 dogs and knocked all of the drywall off the walls. The floors were destroyed and the carpet didn’t exist. That house might sell for $180k due to the issues and repairs needed. Under the current mark to market system, a bank would likely be required to value your similar asset at $180k.
The banks might also be allowed to revert this to Q1. Some troubled banks could be getting healthy fast!