Level 3 Assets


DEFINITION of 'Level 3 Assets'

Assets whose fair value cannot be determined by using observable measures, such as market prices or models. Level 3 assets are typically very illiquid, and fair values can only be calculated using estimates or risk-adjusted value ranges. In addition to Level 1 and Level 2 assets (both of which have more accurate fair values), Level 3 assets must be reported on by all publicly traded companies as of 2008.

BREAKING DOWN 'Level 3 Assets'

This classification system came about as a result of FASB Statement 157, which aims to bring clarity to the balance sheet assets of corporations. Even though they are hard to value, Level 3 assets are held at large investment shops and commercial banks by the billions.

These assets received heavy scrutiny during the credit crunch of 2007, as many Level 3 assets consist of mortgage-backed securities (which suffered massive defaults and write-downs in value). The firms that owned them were often not adjusting asset values downward even though credit markets had dried up in the market for asset-backed securities, and all signs pointed to a decrease in fair value.

  1. Level 2 Assets

    Assets that do not have regular market pricing, but whose fair ...
  2. Level 1 Assets

    Assets that have readily observable prices, and therefore a reliable ...
  3. Intrinsic Value

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  4. Credit Crunch

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  5. Mark To Market - MTM

    1. A measure of the fair value of accounts that can change over ...
  6. Mortgage-Backed Security (MBS)

    A type of asset-backed security that is secured by a mortgage ...
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