Rules on toxic asset valuations lifted

Banks in the United States are being given more discretion in valuing the toxic mortgage assets that have poisoned their balance sheets in a reversal of parts of the controversial "mark to market" accounting rules that many blame for exacerbating the credit crisis.

The Financial Accounting Standards Board has voted to let banks ignore market prices for assets if they judge the market is illiquid and the most recent sales are being done at firesale prices by distressed sellers.

There will also be changes to allow banks to book smaller losses on impaired assets that are available for sale, which could take additional pressure off many of the biggest banks in the US.

The Centre for Investors and Entrepreneurs welcomed the move.

Its director, John Berlau, said: "By itself, this change will not make the price of mortgage assets higher or lower. Rather, it will allow price discovery to occur.

"Mark-to-market distorted the market by forcing banks to take losses on mortgage assets even if the underlying loans were still performing."

The issue is at the root of the problems facing banks over trillions of dollars of mortgage-related assets, many of which have not traded for 18 months.

As mortgage arrears have ballooned, investors have fled the market and those wanting to buy them are not keen to pay top dollar.

The few early trades, at low valuations, forced all the banks holding similar assets to write off more than US$500 billion ($857 billion), sending several large players to the point of insolvency.

Since then, banks have refused to accept dramatically lower prices, believing that their losses will be less if they hold the assets until all the underlying mortgages have been paid back.

The stalemate, though, has led to frozen credit markets and worsened the recession.

Many investors were not impressed with the board's decision, saying more flexibility with the rules will let big banks hide the real value of their toxic assets.

- INDEPENDENT