The proposals on “fair value” accounting by the Institute of International Finance, an alliance of 300-plus companies chaired by Josef Ackermann, Deutsche Bank’s chairman, would enable financial companies to cushion the blow of financial crises by valuing illiquid assets using historical, rather than market, prices.
Under the plan, which has been obtained by the Financial Times, banks that decided to keep assets on their balance sheet would also be freed from the requirement to hold them to maturity and would be able to sell them after two years.
The IIF’s proposals, which were sent to US and European central banks, governments and accounting watchdogs, underline financial groups’ view that the credit crunch will inflict long-lasting damage on their business.
The IIF’s paper says: “The writedowns required under current interpretations may be substantially in excess of any actual or reasonably probable loss on many instruments”.
Financial companies around the world have been hit by more than $300bn in writedowns and been forced to raise more than $260bn from outside investors since last year, according to Bank of America analysts.
Senior bankers have long sought a change to the accounting rules, arguing that the requirement to mark the value of assets to the market price even when markets are illiquid or frozen creates a vicious circle of excessive losses, capital depletion and forced asset sales.
“Often dramatic writedowns of sound investments required under the current implementation of fair-value accounting adversely affect market sentiment, in turn leading to further writedowns...in a downward spiral that may lead to large-scale fire sales of assets,” the IIF’s paper argues.
However, accounting standard-setters in the US and Europe so far resisted pressure to relax fair value rules. Other regulators have also criticised financial companies for proposing rule changes that would reduce the impact of a crisis triggered in large part by their aggressive lending and underwriting practices. The IIF declined to comment.