Wednesday, July 30, 2008

Why we need symmetrical rules on accounting

Sir, The main problem with the constructive proposal by Jean-François Lepetit, Etienne Boris and Didier Marteau on "how to arrive at fair value during a crisis" (Comment, July 29) is that it is still "pro-cyclical". Offering accounting forbearance to banks when asset prices plummet, but not in the boom when roaring prices contribute to excessive lending, will strengthen the incentives for excess that lead to crises in the first place.

If adjustments to mark-to-market accounting are justified on the downside, they need to be done on the upside. To avoid succumbing to political pressure, the accounting regulator would need symmetrical rules to determine when to adjust mark-to-market accounting.

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