Mark-to-Market Didn't Hurt Banks During Financial Crisis

(MoneyWatch)  Bankers and other critics of "mark-to-market" accounting say it helped trigger the financial crisis by forcing banks to dump loans and securities at fire-sale prices, putting a torch to the whole industry. Lawmakers responded to such concerns by pushing regulators to ease these requirements, allowing banks to keep toxic assets without writing down their value. Which is where many of those assets sit -- festering -- to this day.

But a new study out of the Federal Reserve Bank of Boston says the idea that fair value accounting, as it's formally known, damaged banks during the crisis is nonsense. Mark-to-market had little impact on large financial institutions, writes Sanders Shaffer, director of accounting policy and analysis at the Boston Fed. Here's what did:

Capital destruction was due to deterioration in loan portfolios and was further depleted by items such as proprietary trading losses and common stock dividends. These are a result of lending practices and the actions of bank management, not accounting rules.

Bad loans, reckless trading, fiddling as the temples burned. Let's not lose track of that thread, as the storylines snag on this or that inconvenient truth.

Shaffer, who focused on banks with at least $100 billion in assets, says there's no evidence that mark-to-market rules drove banks to throw assets overboard at distressed prices. Rather, to raise the capital they desperately needed to stay afloat, institutions mostly tapped government programs and the debt and equity markets.

The conclusion reached here is that for most banks in the sample, fair value adjustments had only a small percentage impact on regulatory capital; thus the link between fair value and capital destruction is not evident.

It's a dense, technical paper, but financial wonks may want to have a look.