IIF urges change to accounting rules to stem financial crisis
Written by Meenaa on Tuesday, November 18th, 2008
IIF urges change to accounting rules to stem financial crisis
by Xinhua correspondent Li Baojie
BEIJING, Nov. 17 (Xinhua) — The United States should consider changing the way it accounts for illiquid assets to help stem the financial crisis, a senior official of the banking group Institute of International Finance said (IIF) here Monday.
“We all believe mark-to-market accounting is totally appropriate for tradable assets in a liquid market,” IIF executive director Charles H. Dallara told Xinhua. “But in illiquid market, fair value accounting is problematic. It is perhaps exacerbating problems.”
Many banks blame fair value accounting, also known as mark-to-market, which requires assets be valued at market prices, for billion of dollars in write-downs on mortgage assets in the subprime crisis.
But for illiquid mortgage assets, banks have to value assets at fire- sale prices in the market turmoil, but may not plan to sell the assets now and their value could grow in the future.
Europe has relaxed mark-to-market accounting to ease requirements for marking down investment to help banks have more healthy balance sheets.
“What the European Union has done is to moderate some effects of fair value accounting in illiquid market circumstances. This is what has not been done in the U.S. and right now this is our problem,” he said. “The EU’s is a more pragmatic approach today. The U.S. should ally for international accounting standards.”
Dallara noted that the U.S. also need to take a federal-framed strategy for restructuring mortgages and help borrowers unable to pay their mortgage.
He acknowledged that the U.S. did not have an adequate strategy to stabilize foreclosures, which was the root cause of the financial crisis.
The U.S. Treasury last week scrapped the original plan of using 700 billion U.S. dollars to buy troubled assets to stabilize the financial market.
Dallara admitted the financial crisis was far from over.
“We’re not nearing the end of the crisis. We’re probably moving into a new phase, more oriented around the underlying weakness in the economy, not just the fragility of the banking system.”
Some major economies, like Japan and the Euro-zone had entered into a recession. The U.S. economy contracted at an annual rate of0.3 percent in the third quarter, the biggest slump since the third quarter of 2001.
Dallara stated that the economy may bottom out by mid 2009.
“For the next six to nine months, it will be painful with dramatic increases in job losses,” he said.
To effectively tackle financial instability, the world needs a more coordinated global approach, both monetary and fiscal, by theG7, plus a few major emerging markets, such as China, Brazil and India, Dallara said.
He said China’s 4 trillion (586 billion U.S. dollars) stimulus package will help stabilize the domestic economy as foreign demand weakens and will also make meaningful contributions to global economic stability.
He suggested that China, given its scale of economy and its amount of forex reserves, should have a greater seat at the table of global forums and play an increasing leadership role in the global economic adjustment process.
“The voice of China is also important to resist finance and trade protectionism,” he said.
Dallara also called for the set up of a global financial regulatory coordinating council to increase consistency and effectiveness of global regulation. The G20 meeting over the weekend has agreed to increase supervision of banks and credit rating agencies and tighten regulation of high-risk financial products.
