If you’re actually concerned about solvency; about whether banks can meet their obligations, this makes no sense (h/t naked capitalism):

The action by the four banking agencies provides more favorable accounting treatment of so-called good will, an intangible asset that reflects the difference between the market value and selling price of a bank.

Uh yes, because people right now are willing to pay more for a bank than the value of its assets minus liabilities. Not. This isn’t mark to market, this is mark-to-make-believe.

Under the proposal issued this week, the regulators would permit buyers of banks and thrifts to count some of the good will toward meeting their regulatory capital requirements… Banking industry executives who have long sought changes in accounting treatment of good will applauded the decision.

So let me get this straight. Over the past week, regulators have decided to allow banks to:

  1. Gamble with depositors money by getting rid of the rule that said they couldn’t use that money to prop up their investment banking divisions, because using depositor money to gamble used to be considered bad.
  2. Decided to allow them to us an "asset" that you can’t actually sell or borrow against, and whose value is pretty much whatever banks say it is, to meet reserve requirements?

Truly, as my friend Suzanne said, this is Tinkerbell regulation. "If only we believe the banks have more money, they do!" And "nothing could go wrong with letting banks gamble with depositor’s money!"

And what happened the last time regulators gave the financial sector something it thought it really really wanted? Barry Ritholz tells us:

You read that right — the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

Instead, the 2004 exemption — given only to 5 firms — allowed them to lever up 30 and even 40 to 1.

Who were the five that received this special exemption? You won’t be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.

Easing regulation is what got us into this. Making banks balance sheets even more a fantasy than they are already is not going to "increase confidence" and neither is letting banks gamble with depositor money. This is not Never Never Land, for all that the regulators act as if it is. "If only we believe!"