Tuesday, December 6, 2011

Be Careful of Mark-to-Market Bank Accounting

You keep hearing about banks having to beef up capital to ward off problems in the world economy. Looming in the background is always this question of a potential lack of bank stability.

Banks are being forced to add capital. However, the more they do, the less they have with which to do business; the idea is to make loans so that industry can thrive, not primarily that banks can remain alive and do nothing else.

What is never really addressed is the decision to determine bank values in an emergency. If that is done on a daily fictitious basis as in the U.S. in 2008/2009, the banking problem will persist. You cannot determine asset values if many of the assets have limited markets and their values are not easy to determine.

Such mark-to-market evaluations of subprime assets were a major cause of much of the banking meltdown at that time. ( See the Earl J Weinreb NewsHole® comments.)

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