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FASB fair value rules ‘undermine stability’

Thursday 18 November 2010 - by Will Henley

Major revisions to financial instrument accounting rules proposed by the US Financial Accounting Standards Board have come under fire from the Federal Deposit Insurance Corporation.

In a speech to securities industry professionals in New York on Wednesday, Sheila Bair, chairman of FDIC, warned that FASB's plans to introduce fair value accounting could "undermine financial stability".

Bair said: "While we understand that the objective of the rule is to make financial statements more transparent, we believe that its effect could be to undermine financial stability by making bank performance more procyclical."

"In short, we do not believe that a bank - whose business strategy is to hold loans and deposit liabilities for the long term - should be required to measure them at fair value on the balance sheet.

"Why? Because fair value does not necessarily reflect the manner in which the cash flows associated with these instruments will be realised or expended."

Under the changes advocated by FASB, loans, deposits and most other financial instruments would be marked at fair value as a de facto standard for measuring assets and liabilities.

In September, FDIC, along with the four other main federal bank regulatory agencies, submitted a joint letter to FASB outlining their opposition to fair-value measurement.

In the letter, Bair and her counterparts called for the continued application of amortised cost accounting, where banks use financial instruments for the collection or payment of regular cash flows.

Speaking on Wednesday to the joint AICPA and SIFMA conference on the securities industry, Bair said that she instead supports improved supplemental disclosure of fair-value information in order to give investors a "more informed view".

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2010-12-04 10:34:38 | Anonymous
What has been prompt up over the past couple of months is a notion of business model and that drive the appropriateness of use of fair value or amortized cost. No doubt fair value is relevant measure but does current value is always fair for many. A multimillion question is whether FASB leaned towards mix measurement model like IASB as their proposal is not welcomed by many folks and since market are very cyclical and reflecting the volatility on balance sheet is not that prudent for entities not affected by the cyclicality as the loan are still performing for them. So mix measurement is though not perfect answer but (personally believe) err on the safe side.
2010-12-02 21:26:33 | KPOM
Pretending that fair value doesn't exist doesn't make the system more stable. The financial crisis was caused by banks making bad loans, not by fair value measurements.
2010-11-22 22:14:06 | James W. Field
Implementing "Fair Value" as presently proposed by the FASB would be a disaster. After each crash the accounting profession tries to come up with more sophisticated ways to measure the value of assets. The end result is that the measurements actually end up exaggerating the swings in the "value" of the assets they are measuring.
2010-11-19 21:58:02 | Anonymous
Fair value accounting should only be used for loans originated and warehoused for securitization. Loans originated for the balance sheet for longer terms guaranteed by solvent entities should not be subject to fair value rules unless the loans are classified as substandard or worse. Third party appraisals are sufficient to fairly value the collateral once it is down graded. Marking balance sheet assets to market given market bid/ask spreads would be procyclical and destructive creating a great deal of financial instability. Bankers got in trouble buying AAA investments that became no longer of value and because of the greatest missed assessment of real estate aggregate debt risk the world has ever experienced. Demonize the credit rating agencies, economists, regulators, and bank managements for failing to identify increasing risk in RMBS and CMBS issuances and within bank balance sheets real estate loan portfolios from 2003 through 2007. All negative economic consequences were because of this missed assessment of aggregate real estate debt growth risk in the U.S, Spain, Ireland, Iceland, and the U.K. I agree with Ms. Bair!
2010-11-19 21:42:17 | Anonymous
Everyone can defend his or her position on evaluating banks' assets at a fair market value, but what it the FMV of a loan or a liability. Let's take some facts to support our points of view. I believe it is more conservative and safe to keep loans in book as it is now and emphasize on the loan loss reserve and require supplemental disclosures; therefore, I agree with Bair.
2010-11-19 19:39:17 | Randall Senn
Fair value, or market value, reflects the current thinking of market participants about the future cash flow of the instruments.

< Yes, we can debate whether "market" value is always "fair" value, but in a liquid market I think we'll mostly agree that it is. >
2010-11-19 18:32:01 | Zane Dennis
I agree with Ms. Bair, finally someone that understands the business. The fiction about fair value reporting is that anyone really knows the fair value of anything (prior to sale anyway).
2010-11-19 17:55:51 | Anonymous
I disagree with Ms. Bair. The issue is not, whether or not Banks should report the true value of their assets and liabilities. Rather, it is the process of valuation, as defined by the FASB Fair Value Standard 157; the process so violates the basic premises of valuation as to be useless to financial statement users. If Ms. Bair wants the financial institutions to be exempt from such computations then she should promote regulations that place economic responsibility on financial institution boards and management for loan losses, at the personal level. If these individuals had real skin in the game, rather than playing with depositors money, being paid incomprehensive sums for it, and having to accountability for their actions, it is doubtful that the financial institution meltdown would have been nearly as extensive. Now if we can just get more people to understand the lack of accountability and risk exposure at the top of our finanical institution system
2010-11-19 17:29:24 | Anonymous
I think fair values bode many problems fo the US, when the Euros don't have it figured out for sure
2010-11-19 15:44:02 | David Mosso
Ms Bair is spouting a line from the American Bankers Association propaganda book. " hold loans and deposit liabilities for the long term" is not a strategy it is an excuse for covering up deteriorating financial condition.
2010-11-19 15:16:25 | Joe Jefferis
Fair value is an instant measure of success or failure and adds little, if any, value for an investor interested in long term stability.

We did not have a financial crisis in the USA until the mark-to-market collapse of oil futures contracts between July 2008 and September 2008.
2010-11-19 15:11:55 | Philip Stoler
Our financial reporting system has undergone numerous changes in recent years and it would be a disappointment to disrupt the momentum now. Our society tends to have short-term memories so we should not forget why the fair value rules were created and proposed in the first place.
2010-11-19 14:56:31 | RichardF
She is right. Fair value is useless and only obscures the information presented in a balance sheet.
2010-11-19 14:50:21 | Anonymous
I tend to agree with Ms Blair that bank loans and liabilities should not be required to be marked as fair value. Banks should not be treated the same way as investment houses which hold financial instruments for investment purposes.
2010-11-18 14:03:33 | Martin Carus
It's about time! The Emperor has no clothes.