Reacting to remarks by Treasury Secretary Henry Paulson, the American Bankers Association (ABA) has urged quick action to correct problems caused by mark-to-market accounting. The ABA responded to a speech Paulson delivered on November 20, in which he acknowledged that it is important to address any aspects of the financial system that reinforce rather than counterbalance economic cycles — including mark-to-market accounting.

In a letter to Paulson, ABA president and CEO Edward L. Yingling strongly agreed with Paulson’s assessment of mark-to-market accounting, stating that the past year “has demonstrated that the consequences of these pro-cyclical accounting standards are grave.”

Yingling further noted that because banks will be required to file their year-end financial statements in a few weeks, the time to address the failures of current accounting policy is now, as delay threatens to undo much of the work of Treasury’s Capital Purchase Program. “While the government makes millions of dollars available to increase capital, other policies simultaneously are needlessly, and wrongly, erasing billions of dollars of banks capital,” said Yingling.

In the letter to Paulson, Yingling suggested three things that the Securities Exchange Commission could do in the near term to help alleviate concerns:

• Clarify that the accounting rules for other than temporary impairment are based on credit impairment;
• Clarify that the definition of fair value is based on willing buyer/willing seller rather than exit price; and
• Delay the implementation date for the new business combination rules, which affect mergers and acquisitions.

The letter was simultaneously sent to the SEC, the Federal Reserve, incoming Treasury Secretary Timothy Geithner, and Democrat and Republican leaders of the House Financial Services Committee and the Senate Banking Committee.