Thursday, April 9, 2009

S&P: Mark to Market Rule Changes Don’t Help Banks

Standard & Poor's says that changes made by the FASB to mark-to-market rules on valuing securities in illiquid markets and on other-than-temporary-impairment don’t change anything for banks.

S&P said that its ratings of banks won’t change, in spite of the rule changes. U.S. banks lobbied heavily in favour of the new rules.

Related comments by S&P:
  • "In our view, the revised fair-value measurement standard provides more flexibility in how banks and other financial institutions will value financial assets,"
  • "when market observations are substantially lacking or are meaningfully influenced by temporary supply-and-demand imbalances or market disruptions." This "should be accompanied by relevant financial statement disclosures."
  • the key indicator to watch in the upcoming round of quarterly filings from large complex banks will be expansions in the valuation of level 3, or illiquid assets
  • They are in favor of the increased transparency of credit losses the “other than temporary impairment losses” rules bring, but that they could result in “reliability issues related to a company’s ability to bifurcate losses into credit and noncredit components because the credit impairment amounts may be difficult to decipher in isolation.”
  • Fair value measurement changes will result in increased analysis in evaluating significant adjustments companies make to observable market prices and related assumptions and judgements they apply.
  • “This shift [to assets being valued using level 3] ... is a move toward greater use of internally derived measures," Determination of whether a market is active or not will be based on "the highly subjective judgement of each company."

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