Fair Value Accounting to Boost Bank Assets?

In light of the current economic crisis, the US Government decided to give banks and other institutions more leeway in the method they use to determine the value of their troubled assets (read subprime mortgages). This change means that banks are now able to set the value of the “toxic assets” they hold in their portfolios, which will affect the bottom line of their balance sheets from here on out.

According to CNN:

The Financial Accounting Standards Board, the private sector body that sets U.S. bookkeeping rules, moved Thursday to adopt a rule that makes clear that firms need not write down the value of their assets based on so-called distressed sales of similar assets by other banks.

Banks stock prices to rise?

This could potentially cause bank stocks prices to rise because they can report the value of their assets as they see fit – regardless of actual value. While the value of their balance sheet will change, that doesn’t change the underlying assets they hold, or the underlying risk of owning bank stocks. Just because stock prices increase, doesn’t mean it’s a good time to buy. In fact, this is removing one more layer of protection for the investor and consumer – which is exactly what got us in theis mes in the first place.