It is reported that, after SEC in the U.S. relaxed the Mark-to-Market accounting rules, EU is also looking into changing the application of the valuation method, particularly to the banks and financial institutions that carry on their Balance Sheets substantial amounts of sub-standard assets.
The logic is, I guess, by lifting the requirement for revaluing the carrying amount of such assets which would erode the accounting capitals since the book values are substantially below the assets' market value, the capital adequacy ratio of these institutions would be in much healthier shape.
But should the marketplace be sophisticated enough to differentiate between accounting capital and economic capital?
Besides, mark-to-market has already been practiced form years resulting in many of the assets being carried at previous periods' market prices. So, if mark-to-market were to be suspended and if historical prices were to be adopted, these assets will have to be revised down also. Given the inflated prices go back several years, these assets will have to be written down to historical prices which in effect neutralises the original intension of the suspension.
Or would the authorities then say: " higher of the historical or market value"?
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