Chairman Sheila Bair told Congress in March that accounting rules don't permit banks to build reserves in a benign economic environment, forcing them to increase them when things turn bad.
There is enough wiggle room in the accounting rules for banks not to be bound by this price level but the news from Merrill signals the likelihood of more fair-value losses to come.
But there would probably be only a limited impact on capital because accounting rules give banks wide latitude in calculating the net present value of the bonds, enabling them to reduce the hit they would take to capital.
Deficiencies in current accounting requirements may be encouraging banks to transfer credits to insurance companies or other institutions, and that transfer may well not be transparent.
What the fed creates are entries in an accounting system which give the banks permission to act as if there is extra money on their balance sheets.
In the meantime, the Financial Accounting Standards Board (FASB) clarified the rules and gave banks, in particular, a potential defense.
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Incurring billions of losses on bonds once thought to be among the safest bets in the market and recorded as risk-free in banks' balance sheets under European accounting rules would be traumatic.
Ed Ketz, an associate professor of accounting at Penn State, says the reason banks are in trouble is that they invested in a lot of risky securities.
The wholesalers, such as Hong Kong-based Offshore Incorporations Ltd (OIL), sell companies to legal and accounting firms, banks, corporations and also (often in bulk) to web-based resellers.
Mark-to-market accounting rules, which the government imposed in 2007, forced banks and life insurance companies to write down the value of their regulatory capital as if it were a day-trading account.
And, in the new financial year, changed accounting rules will oblige banks to carry shares on their books at market value.
While such a toe-the-line decision would generate sighs of relief in the boardrooms of otherwise culpable investment banks, accounting firms and law firms, it is the groans of disappointment at the kitchen tables of victimized shareholders that should ultimately resonate more loudly.
In March, it abandoned all vestiges of realistic accounting by allowing banks to value their massive share portfolios, whose worth counts towards their capital, at historical rather than current market prices.
Moreover, foreign banks accustomed to sound regulation, prudent oversight and honest accounting in their home countries may lobby for the same things abroad.
Recent changes in accounting rules will amplify this, because it has become harder for banks to spread the building of reserves over the cycle.
Louis Jordan at Deloitte Touche Tohmatsu, an accounting firm, believes that European insurers and banks will go their separate ways again in future.
Banks are stuck with 40-year old branch accounting systems that process in overnight batch, said Schlesinger, who is based in the UK. The systems assume a customer goes through a branch.
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Traders are intensely focused on level 3 reported by the banks, because new accounting rules changing the way assets are valued kick in later this month and could fuel a new wave of write-downs.
From January 1999 most banks, all stock markets and many companies will do their accounting and transactions in euros.
PAN's but in fact is more like creative accounting: it would bring forward the day when the banks have to meet the share of the dud debt that they agreed to at the start, when they sold their loans to Fobaproa.
The Justices ruled 5-3 Tuesday that third parties, such as investment banks, accounting firms and suppliers, can be shielded from liability if they engage in business with companies that are involved in securities fraud.
Winstar case, in which he successfully argued that the federal government violated contracts with certain banks by changing accounting rules during the savings and loan crisis.
The bank levy, in particular, will drive banking activity overseas, and banks will avoid most risk adjustments through accounting sleights-of-hand.
In addition, new accounting rules would make it easier to get an overview of the scale of the banks' bad debt problem, according to the draft.
An even bigger threat is a proposed new accounting rule that would require banks to "mark to market" any loan commitments that can be traded in the secondary market.
The Bank of England points out that, in Denmark, which brought in an accounting system akin to fair value some years ago, one result has been that the volatility of banks' capital ratios has risen sharply.
As I railed over and over in blogs, speeches and TV appearances prior to April 2009, the strict application of mark to market accounting to banks had a devastating impact on bank capital during the early stages of the financial crisis.
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