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November 14, 2008

UK professor calls for mark-to-funding measurment

Mark-to-market accounting has added to the current financial crisis and should be replaced with a mark-to-funding model, according to Avinash Persaud, chairman of financial advisory firm Intelligence Capital Limited and trustee of the Global Association of Risk Professionals.

Speaking at a lecture in London this month, Persaud said regulators’ decisions to allow banks to reclassify some financial instruments was not the right solution and is tantamount to moving “out of the frying pan and into the fire”.

Persaud, a professor emeritus of London’s Gresham College, noted that allowing banks to use mark-to-market measurement during the good times, but not the bad, would only exacerbate the problem. He said banks that choose the reclassification option could say they intend to hold assets to maturity when they don’t have the capacity to do so.

A mark-to-funding model would mean a bank that has a 20-year loan, with 20 years of funding to support it, would not be affected by the day-to-day fluctuation in market prices.

Lenders with short-term funding to back loans they issued would still effectively mark-to-market.

Persaud said this would encourage long-term investors to buy cheap assets, rather than the current trend, which has shown few bargain-hunters, just more panicking sellers.

“People are being held back from looking at the five- and ten-year view because of mark-to-market accounting,” he said.

Persaud also suggested that now is politically the right time to make amendments to accounting rules as “there is a mood for change”.

Carolyn Canham

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