Debate over Mark-to-Market Rules for Banks, Insurers Has Common Sense Resolution: C.D. Howe Institute



    TORONTO, Feb. 27 /CNW/ - Banks and insurers should mark their assets to
market in most normal circumstances, says a report published by the C.D. Howe
Institute, but not amid financial crises.
    In "Marking to Market for Financial Institutions: A Common Sense
Resolution," authors Franklin Allen, Elena Carletti and Finn Poschmann examine
the intensifying debate over whether, in valuing assets and liabilities on
financial institutions' balance sheets, market prices provide the best
available estimate of value - or if, in times of crisis, using market prices
could lead to serious distortions.
    In most circumstances, market prices reflect future earning power and
should be used; at other times, such as in financial crises when liquidity is
scarce and price information is sparse, market imperfections imply that they
should not.
    When liquidity constraints affect market prices, model-based and historic
cost valuations may provide helpful information. The rest of the time, and in
particular when asset prices are low because expectations of future cash flows
have fallen, mark-to-market accounting should be used instead.

    For the study click http://www.cdhowe.org/pdf/ebrief_73.pdf




For further information:

For further information: Franklin Allen, Nippon Life Professor of
Finance; Professor of Economics, Co-Director, Financial Institutions Center,
Wharton School, University of Pennsylvania; Elena Carletti, Professor,
European University Institute; Finn Poschmann, Vice President, Research, C.D.
Howe Institute, Phone: (416) 865-1904, Email: cdhowe@cdhowe.org


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