In mark to market accounting, financial institutions follow a similar procedure at the end of each fiscal year. This practice was made law in 1993, to avoid a repeat of the Savings and Loan crisis, which used historical accounting, often blamed for hiding the true value of the banks' declining assets.
Ironically, the mark to market accounting is now being blamed for causing the 2008 credit crisis. That's because banks increased the value of their mortgage-backed securities as housing values skyrocketed. To maintain a balance between assets and liabilities, the banks felt pressure to increase the amount of loans they made.
The reverse is also true. When asset prices start to fall, mark to market accounting means that banks feel pressure to loan less, to make sure their liabilities aren't greater than their assets. (Source: FT.com, True impact of mark-to-market accounting in the credit crisis, February 29,2008)
