When markets are dysfunctional or illiquid, I have doubts whether marking-to-market provides accurate or useful information, especially from a medium or longer-term perspective. Moreover, the current impairment rules have not allowed banks to have forward-looking provisions or dynamic provisioning, so that they would build up provisions in good times and draw them down when the cycle turns and defaults surface.
This should make us think again. Accounting standards do not exist in a vacuum – they have an impact on financial stability and ultimately on the real economy.