Banks and insurers should mark their assets to market in most normal circumstances, says a report published by the C.D. Howe Institute, but not amid financial crises.

In the report, authors Franklin Allen, Elena Carletti and Finn Poschmann examine the intensifying debate over whether, in valuing assets and liabilities on financial institutions’ balance sheets, market prices provide the best available estimate of value — or if, in times of crisis, using market prices could lead to serious distortions.

In most circumstances, market prices reflect future earning power and should be used; at other times, such as in financial crises when liquidity is scarce and price information is sparse, market imperfections imply that they should not, the report argues.

When liquidity constraints affect market prices, model-based and historic cost valuations may provide helpful information.

The rest of the time, and in particular when asset prices are low because expectations of future cash flows have fallen, mark-to-market accounting should be used instead.