Bankers in India are worried over the proposal by the US to suspend rules that require banks to value assets at market rates. Bankers feel that this could push the global financial system into a deeper credit freeze and as a semblance of stability brought about by the measure would only be an illusion.
Any proposal that allows banks the freedom to not disclose the true and correct picture of their financial condition could further dent the already shaken confidence of the global financial system, bankers said.
The proposal is one of the inducements included in the $700 billion rescue package. It reiterates the authority of the regulators to suspend the asset valuation regulation.
Arun Kaul, head of treasury, Punjab National Bank, the country’s third largest bank, said the financial markets worldwide will not get the true and correct financial status of banks in the US if these financial services providers are not required to value their assets at the prevailing market price.
The rationale for introducing the mark-to-market norm was to bring in transparency in assessing the health of a bank, at any particular point in time. The norm requires banks and companies to assess their assets and report losses if their market values are lower.
The American Bankers’ Association, companies and lawmakers have urged the US Securities and Exchange Commission (SEC), the equities market regulator, to suspend or ease the valuation rule.
“One will not be able to assess the real health of a bank at a given point (if the prudential valuation norm is suspended),” said Bimal Jalan, former governor of the Reserve Bank of India and a nominated member of the Rajya Sabha.
“It is a retrograde step. The US is going back to olden times at a time when accounting has progressed in modern times. The market must know the true and correct state of financial health of banks,” Kaul said.
Inability of regulators to ensure banks made disclosures led to the shock collapse of entities like Lehman Brothers. It had assets of $639 billion against reported credit losses and asset writedowns of just $13 billion before the world got to know it had collapsed.