'Bank writedowns may be overdone'
'Banks are marking their securities against an index that suggests the losses will be 32 times worse than the actual loss experience.'
By Bloomberg |
WASHINGTON: Nothing has done more to disturb financial markets in recent months than the huge writedowns in the value of bank assets related to subprime mortgages. Some of them may have gone too far.
Federal Reserve chairman Ben S Bernanke said in congressional testimony on February 28 that accounting rules may be forcing banks to put artificially low values on little-traded assets when they mark them to market.
The inability to value such assets on the basis of actual trades, Bernanke said, is ���one of the major problems that we have in the current environment. I don���t know how to fix it.
I don���t know what to do about it.��� Writedowns in the tens of billions of dollars have forced some large institutions, including Citigroup, to raise new capital to offset losses and perhaps made them less willing to extend credit, hurting economic activity.
Some analysts, such as Richard Bove of Punk Ziegel, say the tools banks are using to value their assets ���don���t reflect the real world���.
���This mark-to-market accounting forces banks to mark their portfolios against indexes that aren���t representative of what���s going on in the markets at all,��� Bove said in a February 28 interview. One index banks use ���shows something like an 8% potential loss in commercial real estate in the US,��� he said. ���Do you know what the actual loss is right now? One quarter of 1%.���
In other words, banks are marking their securities against an index that suggests the losses will be 32 times worse than the actual loss experience, Bove said. ���We���re marking against fallacious indexes,��� he said, ���and that���s creating more problems than necessary.���
A key issue is that with many investors shunning risk, an asset that in the future might have substantial value may have few if any buyers now.
One of the reasons for having a mark-to-market requirement was to prevent institutions from carrying an asset at its purchasing price more of less indefinitely when its current value was lower.
Still, does it really make sense to mark-to-market in the midst of such financial turmoil? Many subprime-related assets are worth much less than par, though some analysts seem to take delight in inflating the potential losses on them, as I wrote in an earlier column.
Bernanke was responding to a question from Senator Charles Schumer, a New York Democrat, who said he had heard ���from many people��� that the valuations have been ���artificially low���.
That leads to a vicious cycle, he said, in which the writedowns sap bank capital and they can���t do any more lending and everything���s frozen up. Schumer suggested one response might be to have a six-month grace period on mark-to-market.
The risk on the other side is that if you do too much forbearance or delay mark-to-market, the suspicion will arise among investors that you���re hiding something, he said, adding, This is really an accounting board responsibility.
In one important regard, Schumer���s premise also exaggerated the problem. Even with all the writedowns and other types of losses, the vast majority of US banks are still well capitalised.
The Federal Deposit Insurance said in its Quarterly Banking Profile released February 26, that at year-end 99% of all insured institutions, representing more than 99% of the nation���s banking assets, met or exceeded the highest regulatory capital standards.
Federal Reserve chairman Ben S Bernanke said in congressional testimony on February 28 that accounting rules may be forcing banks to put artificially low values on little-traded assets when they mark them to market.
The inability to value such assets on the basis of actual trades, Bernanke said, is ���one of the major problems that we have in the current environment. I don���t know how to fix it.
I don���t know what to do about it.��� Writedowns in the tens of billions of dollars have forced some large institutions, including Citigroup, to raise new capital to offset losses and perhaps made them less willing to extend credit, hurting economic activity.
Some analysts, such as Richard Bove of Punk Ziegel, say the tools banks are using to value their assets ���don���t reflect the real world���.
���This mark-to-market accounting forces banks to mark their portfolios against indexes that aren���t representative of what���s going on in the markets at all,��� Bove said in a February 28 interview. One index banks use ���shows something like an 8% potential loss in commercial real estate in the US,��� he said. ���Do you know what the actual loss is right now? One quarter of 1%.���
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In other words, banks are marking their securities against an index that suggests the losses will be 32 times worse than the actual loss experience, Bove said. ���We���re marking against fallacious indexes,��� he said, ���and that���s creating more problems than necessary.���
A key issue is that with many investors shunning risk, an asset that in the future might have substantial value may have few if any buyers now.
One of the reasons for having a mark-to-market requirement was to prevent institutions from carrying an asset at its purchasing price more of less indefinitely when its current value was lower.
Still, does it really make sense to mark-to-market in the midst of such financial turmoil? Many subprime-related assets are worth much less than par, though some analysts seem to take delight in inflating the potential losses on them, as I wrote in an earlier column.
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Bernanke was responding to a question from Senator Charles Schumer, a New York Democrat, who said he had heard ���from many people��� that the valuations have been ���artificially low���.
That leads to a vicious cycle, he said, in which the writedowns sap bank capital and they can���t do any more lending and everything���s frozen up. Schumer suggested one response might be to have a six-month grace period on mark-to-market.
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The risk on the other side is that if you do too much forbearance or delay mark-to-market, the suspicion will arise among investors that you���re hiding something, he said, adding, This is really an accounting board responsibility.
In one important regard, Schumer���s premise also exaggerated the problem. Even with all the writedowns and other types of losses, the vast majority of US banks are still well capitalised.
The Federal Deposit Insurance said in its Quarterly Banking Profile released February 26, that at year-end 99% of all insured institutions, representing more than 99% of the nation���s banking assets, met or exceeded the highest regulatory capital standards.
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