Accounting rules probably understated, not overstated, the losses embedded in the financial system, according to a report today from an influential group of policymakers. The report concludes, controversially, that the rules did not add to the pro-cyclical nature of the financial system.
It is widely assumed that the practice of marking assets to market prices and not reserving for expected losses on loan portfolios added to the woes of the financial system by deepening losses at a point when banks and other institutions could least afford it.
However, the report by the Financial Crisis Advisory Group concludes that because in most countries the majority of bank assets are not marked to market, but kept at their historic value, those values probably underestimated the losses now being exposed by the crisis.