Brussels has warned that a radical overhaul of rules on how banks value their assets could lead to greater volatility in the their accounts, undermining broader financial stability.

European Commission officials have sent a letter to the International Accounting Standards Board criticising the rule-setting body's proposals for financial institutions, the first stage of which are scheduled to be published this week.

The overhaul is aimed at addressing criticism of so-called “fair value” accounting, the system of valuing assets at market prices. When markets fell sharply, banks were forced to mark down the value of their assets, leading to heavy losses.

The IASB reforms will allow more flexibility in determining which bank assets must be marked to market and which can be valued according to so-called amortised cost accounting, which smooths out market volatility. But Commission officials believe the overhaul does not go far enough to limit the use of fair value accounting.

In the letter to IASB, Jörgen Holmquist, director general of Internal Markets at the European Commission, urges the IASB “urgently” to consider further changes.

“It would seem that the current draft may not yet have struck the right balance between ‘fair value' accounting and ‘amortised cost' accounting,” he says. The letter, dated November 4, comes as a Brussels committee is expected to meet today to discuss its response to the overhaul. The near final draft already includes a number of changes demanded by Brussels in September.