- The Fed announced Tuesday it will maintain "exceptionally low" interest rates "for an extended period." Nothing surprising (or alarming) there.
- Something less watched, yet worthy of note, is the possible resurrection of an old FASB debate about mark-to-market accounting rules.
- It's far too early to hypothesize what any changes would be or how they would impact markets.
- Should any new rule pass scrutiny, banks' currently conservative capital cushions would make a sequel to the panic unlikely in the near term.
- Given the impact FAS-157 had on markets two years ago, this is a debate worth watching—but not speculating on just yet.
The Fed held the target rate steady Tuesday, largely maintaining its language concerning economic recovery and unemployment. The statement reiterated that (in an anticlimax to the bated breath in headlines) the central bank will maintain "exceptionally low" interest rates "for an extended period." And as emergency facilities continue to wind down, monetary policy will remain flexible as conditions warrant. Nothing too surprising (or alarming) there.
Something less watched, yet worthy of note, is the possible resurrection of an old debate about mark-to-market accounting rules. Last July, the Financial Accounting Standards Board (FASB), author of infamous FAS-157, proposed an expansion of mark-to-market accounting to include bank loans (now marked at cost on balance sheets). To date, the suggestion has smoldered in the background. Yet the Wall Street Journal noted Monday discussion could be reopened in the coming weeks—should FASB decide to make a formal proposal and open a period of public industry comment.
Given its role in the financial crisis, mark-to-market accounting is a sensitive issue and merits attention. We're ever-vigilant of possible future accounting changes that could again so profoundly affect capital markets. But in this case, details remain sparse and nothing new has yet emerged. Lacking those specifics, it's far too early to speculate on any potential changes or their market impact. Further, should any new rule pass scrutiny, banks' conservative capital cushions—thanks to the nasty period in the rearview mirror and continued political uncertainty now—mean a change could perturb markets, but won't likely spark a sequel to the panic in the near term.
Still, that FASB is even considering such a rule change reiterates how little regulators and politicians seem to have learned from the crisis. (And in one sense, politicians and regulators failing to learn is nothing new—not even remotely.) FAS-157 was largely responsible for the spiraling round of write-downs, imperiling the financial system in 2007 and 2008. The rule was put in place near the market top, and was debated and ultimately amended as the bear market bottomed. Since the amendment, markets have bounced back in dramatic fashion. But conflicted politicians continue to contribute significant uncertainty by simultaneously favoring bank punishment and support.
There's nothing wrong with speculating on potential market impact from pending regulation. In fact, it should be done—weighing likely outcomes and what action is needed, if any. But at this point, there's not even enough reasonably concrete details to fathom what a likely proposal could be, let alone potential market impact. And when a proposal is unveiled, it's hard to know how it will survive the discussion period. So wait and watch—this could fizzle, or form into something worth debating.