(WASHINGTON) Federal Reserve chairman Ben Bernanke on Tuesday advocated changing accounting methods that he said have exacerbated the financial crisis.
Appearing before the Council on Foreign Relations, Mr. Bernanke said current accounting standards need to be revised so they don’t amplify the negative effects of a downturn.
Rules underlying what is known as ‘mark-to-market’ or ‘fair value’ accounting now require companies to disclose the value of certain types of assets based on what buyers would pay for them if they were to be sold now.
But because buyers have fled the marketplace, driving down prices, companies have been forced to write down the value of their assets, even if they don’t plan to sell them for years.
Mark-to-market rules are intended to give investors a clear and accurate picture of the value of a company’s assets. Mr. Bernanke said that remained an appropriate system, but he said policymakers ‘should look to identify the weak points of mark-to-market and try to make some improvements on a more expeditious basis’.
That would likely mean that certain kinds of assets now valued at their market price would instead be valued according to their underlying economic value, which is generally higher.
On Capitol Hill, where the American Bankers Association and other trade groups have been pushing for changes to mark-to-market accounting, Democratic Representative Barney Frank, chairman of the House Financial Services Committee, echoed Mr. Bernanke’s views and said lawmakers are nudging regulators to explore the possibility of implementing new guidelines. A Financial Services subcommittee has scheduled a hearing on the issue for today. ‘The mark-to-market rule has clearly got to be made better in its workings. There has to be more flexibility in its application,’ said Mr. Frank. ‘There has to be discretion in what the consequences are.’
Mr. Bernanke touched on a host of other regulatory challenges in a wide- ranging speech that mapped out the ways in which stronger oversight of the financial system could help avert crises on the magnitude of the current one.
Among the most sweeping changes lawmakers are considering is the creation of a regulator to monitor firms that pose a systemic risk because they are so interconnected with other firms.
The Fed is the leading candidate to take on the job of systemic risk regulator because it already oversees bank holding companies and serves as the lender of last resort. -- LAT-WP
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Bernanke calls for change in accounting standards
12 March 2009
(WASHINGTON) Federal Reserve chairman Ben Bernanke on Tuesday advocated changing accounting methods that he said have exacerbated the financial crisis.
Appearing before the Council on Foreign Relations, Mr. Bernanke said current accounting standards need to be revised so they don’t amplify the negative effects of a downturn.
Rules underlying what is known as ‘mark-to-market’ or ‘fair value’ accounting now require companies to disclose the value of certain types of assets based on what buyers would pay for them if they were to be sold now.
But because buyers have fled the marketplace, driving down prices, companies have been forced to write down the value of their assets, even if they don’t plan to sell them for years.
Mark-to-market rules are intended to give investors a clear and accurate picture of the value of a company’s assets. Mr. Bernanke said that remained an appropriate system, but he said policymakers ‘should look to identify the weak points of mark-to-market and try to make some improvements on a more expeditious basis’.
That would likely mean that certain kinds of assets now valued at their market price would instead be valued according to their underlying economic value, which is generally higher.
On Capitol Hill, where the American Bankers Association and other trade groups have been pushing for changes to mark-to-market accounting, Democratic Representative Barney Frank, chairman of the House Financial Services Committee, echoed Mr. Bernanke’s views and said lawmakers are nudging regulators to explore the possibility of implementing new guidelines. A Financial Services subcommittee has scheduled a hearing on the issue for today. ‘The mark-to-market rule has clearly got to be made better in its workings. There has to be more flexibility in its application,’ said Mr. Frank. ‘There has to be discretion in what the consequences are.’
Mr. Bernanke touched on a host of other regulatory challenges in a wide- ranging speech that mapped out the ways in which stronger oversight of the financial system could help avert crises on the magnitude of the current one.
Among the most sweeping changes lawmakers are considering is the creation of a regulator to monitor firms that pose a systemic risk because they are so interconnected with other firms.
The Fed is the leading candidate to take on the job of systemic risk regulator because it already oversees bank holding companies and serves as the lender of last resort. -- LAT-WP
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