What is mark-to-market accounting?
Loans and securities make up the bulk of a bank’s assets. Thus, the method you use to establish values for these securities when preparing your financial statements affects shareholders’ equity. (Shareholders’ equity = assets – liabilities, remember?) That, in turn, has an effect on a bank’s profit and loss statement. Mark-to-market accounting sets the value of (or “marks”) the assets on your balance sheet to reflect their market sale prices. In theory, that all sounds nice and clean. In practice, things get a little messier. All the way down to Level 3 hell Not all securities are as liquid as Microsoft shares, for which anyone can look up the price on the Internet at any given moment. Some mortgage securities may not even trade once a day; what prices will you use for those? To address this, there is a hierarchy of assets, with a set of guidelines for each: • Level 1 assets have market prices. • Level 2 assets don’t have market prices; they’re marked at fair value based on a model. Th
