Mark-to-market (MTM) is an accounting practice used to value assets and liabilities based on their current market value, which sometimes refers to the price they are trading at on the open market.

MTM accounting is commonly used for financial instruments that are traded on public markets, such as stocks, bonds, and derivatives. It is also used for non-traded assets and liabilities, such as real estate, private equity investments, and pensions. By using MTM accounting, companies can provide more transparent and accurate financial statements that reflect the current market conditions and the economic realities of their assets and liabilities. However, MTM accounting can also lead to increased volatility in financial statements, especially during periods of market turbulence, which can make it challenging for investors and analysts to assess the true financial condition of a company.

Notably, banks only mark-to-market “available for sale” (AFS) securities, which are those securities that might be sold before maturity. The “held to maturity” (HTM) securities, which are those securities that are expected to be held to maturity, are reported at cost, not at fair value. Banks may not mark to market their bond holdings for HTM securities because they do not intend to sell them and realize the losses or gains.

However, this also exposes them to the risk of insolvency if the market value of their assets declines significantly due to rising interest rates (e.g. 2023 Banking Crisis). Banks may also seek regulatory relief to amortize their mark-to-market losses on bond holdings over a longer period of time to reduce the impact on their capital and profitability.

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