In such circumstances the fair value is precisely over the market value

There now is a broad challenge to the evaluation to the value of the portfolio of the banks trading market ("mark to market"), such that imposed by the IFRS accounting standards, on the assumption that it would have helped to accelerate the financial crisis, even to the trigger. The extension of the application of mark to market to the whole of credit portfolios in trading activity degrade beyond a reasonable results from banks, requiring them to new transfers of assets and dilutive recapitalisations. The conclusion of this analysis is that the "fair value" should be abandoned in favour of the return of the posting to the "historic cost".

We do share in any way this conclusion, convinced that the evaluation of the portfolio of trading of a bank to its "fair value" is the only accounting term guaranteeing transparency and discipline. But if we support the principle of "fair value", we strongly condemn the modalities of its implementation in times of crisis. In such circumstances, the "fair value" is precisely over the market value.

The first reason is that market prices quoted are established on a volume of very small exchanges, operators banks and hedge funds supposed to "arbitrate" the gap between the basic price and the market temporarily withdrawing price. The representativeness of the rated price becomes questionable, their application to all of the stock of assets creating a deformation of the value of the portfolios and amplification effect. The second reason is that listed prices are reduced a "crisis backwardation", reflection of aversion collective and irrational investors to the instruments concerned, regardless of their intrinsic value. Taking into account of this offset the opposite of what operators on raw call the "convenience yield", implied performance related to the holding of an asset led to give accounting a pro-cyclique dimension fully contrary to its original mission. By integrating this "backwardation of crisis" in the assessment of portfolios, banks artificially degrade their result in a crisis, reduce their own funds and enter a logic of recapitalisation, or transfer of assets. We consider that the results of the banks should be affected, all trading of assets of credit portfolios, to share in the increase in the probability of default, to a decline in the rate of recovery or enhancement of the correlation between the potential shortcomings of the borrowers. "Backwardation of crisis", temporary nature should be reported to the third party, but must not modify the banking result.

We propose, in the case of major crisis, to stop the pro-cyclical effects of the recovery in the market value by introducing a "fair value adjusted" ("upgraded fair") value. If the regulator considers that the "crisis backwardation" reached a level found abnormally high, it imposes on banking institutions a change of method of enhancement of their credit assets dedicated to trading, the abandonment of the "mark to market", which is no longer the "fair value", and its replacement by a "mark to model" which he fixed the input parameters, primarily the probabilities of default and recovery rates. These exogenous data are established on the basis of a fundamental analysis of the quality of credit assets, take into account the actual degradation of default probabilities, but remove "backwardation of crisis" observed on the spreads. It follows an instant profit, just correct already registered losses and is part of a contra-cyclic logic. This reasoning must apply in an identical manner to a bullish scenario of "bubble" and abnormal weakening of the level of credit spreads. Thus the intervention of the regulator is not asymmetric and does not always in a sense favourable to the banks...

We are convinced that such a device would have to limit the pro-cyclical effects of IFRS, without changing the principle of the "fair value", to which we remain attached to the valorisation of the trading portfolios. The crisis that we are nevertheless allowed to measure the dangers of any extension of the "mark to market" the enhancement of the portfolio of credit banks or the balance sheet of insurance companies. Would open the door to repeated attacks of the same nature on a perimeter still wider...