Thursday

23rd May 2019

Brussels changes accounting rules to help save banks

  • Mark-to-market accounting rules have been blamed for accentuating the current crisis (Photo: European Community)

The European Commission on Wednesday (15 October) changed EU accounting rules to help banks avoid sharp drops in the value of their assets at times of market volatility, such as the present financial crisis.

The move on "mark-to-market" accounting - made by the commission's accounting regulatory committee - has unanimous support from EU member states and will apply for 2008 third quarter corporate results, due to be published soon.

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Under current mark-to-market accounting rules, company assets are valued on the basis of the price they would fetch if they were offered for sale on the market right now instead of what they would be valued were the company to hold on to them until maturation.

During the current crisis, banks in particular have seen their assets plunge in value because of mark-to-market valuation of "sub-prime securities" - financial assets based on loans to borrowers at risk of defaulting - with experts saying the banks' losses would have been much lower if they were valued on the maturation date basis.

The current practice can create a downward spiral in which companies seem to be insolvent.

But under the commission's new proposals, banks and other companies can optionally reclassify assets from the "held-for-trading" category to the "held-to-maturity" category, avoiding the trap.

"The current financial crisis justifies the use of reclassification by companies," the commission said in a statement.

"In these circumstances, financial institutions in the EU would no longer have to reflect market fluctuation in their financial statements for these kinds of assets."

The rule-change is in line with separate moves earlier this week by the International Accounting Standards Board, which crafts accounting standards used in some 100 countries.

The commission's move also comes just eight days after EU finance ministers first proposed the reforms at a 7 october meeting.

"By adopting these amendments, the commission has responded in record time to the request of the [finance ministers]," internal market commissioner Charlie McCreevy said.

Some critics of the manoeuvre however are worried that hedge funds, who would develop their own mathematical models to assign value to assets instead of comparing them to current market values, might exploit the new freedoms to artificially inflating asset value.

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