OxAn Doubts BoE Claim that Subprime Losses are Overstated
Oxford Analytica is not persuaded by the Bank of England’s recent suggestion that mark-to-market loss estimates overstate the damage wrought by the subprime crisis.
The BoE’s optimism contrasts with the IMF’s claim that total financial system losses — estimated at $945 billion dollars — remain in excess of writedowns announced so far by banks and other financial intermediaries.
In a new analysis BoE seeks light amid the gloom, OxAn says “it is debatable whether current pricing methods have led to excessively depressed ABS valuations. Mark-to-market pricing, or ‘fair value’ accounting, is strongly endorsed by the accounting profession.”
By arguing that current mark-to-market pricing is overstating financial losses, the Bank of England appears to be seeking to restore confidence in increasingly risk-averse markets, OxAn Says.
However, its contrarian views have called to question its credibility.
“The wide acceptance of ‘fair value’ accounting makes it unlikely to be dropped as common practice. Moreover, the (BoE’s) latest report fails to analyse sufficiently the market for ABCP or the risk of feedback — from a declining economy to the financial system — should present uncertainties be allowed to persist,” OxAn concludes.
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