Basel Committee gets it right

Last month, the Basel Committee on Banking Supervision issued guidelines to assist the International Accounting Standards Board (IASB) in addressing mark-to-market accounting, loan-loss provisioning, and related disclosures. The principles are in response to recommendations made by the G20 leaders at their April 2009 summit to strengthen financial supervision and regulators.

This is one of the most heartening developments I have seen since the financial crisis hit. Bank regulators and G20 leaders have taken a clear stand against the highly pro-cyclical accounting rules that have caused chaos throughout the world's financial system.

The Basel Committee's guiding principles indicate that fair value is not effective when markets become dislocated or are illiquid and that fair value should not be required for assets managed on an amortized-cost basis in accordance with a company's business model. The principles also indicate that accounting standards should permit reclassifications from the fair value to the amortised-cost approach in rare circumstances following events that clearly led to a business-model change.

The IASB plans to issue the final revised international accounting standard in time for the 2009 year-end financial statements. I wish we could have had this help a year ago, before so much senseless destruction was caused in the worldwide economy and financial system. But late is definitely much better than never.

This action is in stark contrast to the recent, mind-boggling announcement by the US Financial Accounting Standards Board (FASB) of its intent to expand widely discredited mark-to-market accounting to encompass a much larger proportion of bank balance sheets. It is long past time for FASB to be subjected to supervision by the banking agencies, as it is abundantly clear that the Securities and Exchange Commission lacks the will to perform this critical oversight role.