Those Pesky Accounting Standards -- Now Europe

The Economist reports today that the IASB, the body that regulates accounting standards in Europe is under political pressure to loosen fair-value accounting standards, particularly those known as "mark to market". We have, of course, already seen this in Canada and the U.S.. As the Economist describes it

On April 2nd, after a bruising encounter with Congress, America’s Financial Accounting Standards Board (FASB) rushed through rule changes. These gave banks more freedom to use models to value illiquid assets and more flexibility in recognising losses on long-term assets in their income statements. Bob Herz, the FASB’s chairman, decried those who “impugn our motives”. Yet bank shares rose and the changes enhance what one lobbying group politely calls “

European ministers instantly demanded that the International Accounting Standards Board (IASB) do likewise. The IASB says it does not want to be “piecemeal”, but the pressure to fold when it completes its overhaul of rules later this year is strong. On April 1st Charlie McCreevy, a European commissioner, warned the IASB that it did “not live in a political vacuum” but “in the real world” and that Europe could yet develop different rules.

So the rules change, and as this weeks experience shows, banks achieve instant profitability and are suddenly able to fully participate in credit markets. Isn't accounting fun! A stroke of the pen moves them from insolvency to darling of the market! (Warning: don't try this at home.)

Banks worldwide have suggested fair-value proponents are on the wrong planet. However, the Economist throws its considerable weight behind the argument that

[i]t was banks that were on the wrong planet, with accounts that vastly overvalued assets. Today they argue that market prices overstate losses, because they largely reflect the temporary illiquidity of markets, not the likely extent of bad debts. The truth will not be known for years. But banks’ shares trade below their book value, suggesting that investors are sceptical. And dead markets partly reflect the paralysis of banks which will not sell assets for fear of booking losses, yet are reluctant to buy all those supposed bargains.