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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.

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By GlobalData

“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