In some cases, marking banking assets to market prices doesn't make sense. When a bank is holding a deposit, a loan or a similar banking asset for the long-term, it shouldn't have to mark them to market values that may vary widely over time. Extending MTM accounting to all banking assets takes a good approach for market-based assets, like securities, but extends it to areas where it doesn't accurately reflect the business of banking.

We don't need to deepen crises by inaccurately reporting so-called market values for loans and other banking assets. This introduces a level of pro-cyclicality that can have dire consequences when the accounting is divorced from reality. During good times, such an approach could inflate the true value of bank assets and capital strength. And during periods of market stress, losses could be exaggerated.

Moreover, given the idiosyncratic nature of the credit characteristics of individual loans, trying to determine a "market price" for many of them would be more art than science ... and of questionable utility to investors compared to cost accounting. In fact, the apparent "transparency" may be illusory because fair valuing assets and liabilities without any clear "market" prices may simply increase valuation discretion.

I would note that in a recent letter to the President, the oversight body for the International Accounting Standards Board recognizes that cost-based accounting is appropriate for certain financial instruments and that the IASB is not proposing that the loan book of banks be held at fair value.

If the business model is predicated on the trading of financial instruments for the realization of value, or other strategies that essentially focus on short-term price movements, then fair value has relevance. In the trading business model, reporting fair value focuses risk management on short-term price movements and in most cases incentivizes management to define the organization's risk appetite and to mitigate risk through hedging or other means...

In contrast, if the business model is predicated on the realization of value through the return of principal and yield over the life of the financial instrument, then fair value is less relevant. Consider, for example, a bank that finances the operations of a commercial enterprise. The realization of value will come from the repayment of cash flows. Risk management is based on an assessment of the borrower's creditworthiness and the entity's ability to fund the loan to maturity. In this case, the accounting should incentivize the entity to maintain sufficient funding to hold the instrument to maturity and to hold a sufficient amount of capital to cover potential credit losses through the credit cycle, preferably in a designated reserve. Indeed, the use of fair value could create disincentives for lending to smaller businesses whose credit characteristics are not easily evaluated by the marketplace.