Not that anyone here preaches the virtues of short-term market timing, but this Thursday, March 12, could be a big day for bank stocks. Seriously. Big.

The U.S. House Financial Services Subcommittee is holding a hearing on what to do with mark-to-market accounting, acknowledging the absurdities of making banks like Citigroup (NYSE:C) and Bank of America (NYSE:BAC) value financial assets at current market values, even if markets are engulfed in hysteria and diverge from an asset's obvious intrinsic worth.  

Make no mistake about it: If even the slightest inkling comes out of that meeting that mark to market will be scrapped -- or just revamped -- much of the all-out panic gripping bank stocks could evaporate in a matter of seconds.  

Tired of writedowns? Get ready for the writeups.
Quite simply, absent mark-to-market accounting rules, banks could instantaneously repair their balance sheets … at least from an accounting standpoint. By not having to rely on market prices, the valuations of billions of dollars of assets could fall into the hands of an accountant who would "model" (read: guess) what the assets are worth. Since these accountants are internal members of banks themselves, their outcome is almost always that -- surprise! -- assets are worth waaaaaay more than the market thinks.

In case you're wondering, yes, these are the same accountants whose same models predicted that home prices would never fall, subprime was an infallible investment, and 30-to-1 leverage was an awesome idea. In a world where transparency and trust utterly failed investors, allowing banks to tell us what they think assets are worth might seem like a bad idea on steroids. And it is.

But in this specific case, the argument isn't quite that straightforward. Revamping mark to market could hugely benefit the stability of financial markets. AIG (NYSE:AIG) is a good example of how disastrous it can be to force a company to mark assets to market. Here's how Eric Dinallo, insurance superintendent of New York, described it last year:

AIG was forced to mark to market and post collateral against many … positions not because of actual defaults on subprime mortgages, but because of fears of defaults and the drying up of a market to trade these securities, thus resulting in very depressed market prices. By marking its securities to market, AIG was forced to announce losses, which kept growing.

In other words, market panic and accounting rules irrespective of actual losses is dumping fuel on AIG's fire. No one argues that the insurer made myriad mistakes and deserves to be where it is today, but the actual losses once the dust settles could easily be less than the mark-to-market deficits currently indicate. Again, I'm not defending AIG -- I'm defending sensible accounting practices that don't make the problem worse than it already is.

If mark to market is scrapped or relaxed in any way, the biggest winners could include banks like Morgan Stanley (NYSE:MS), JPMorgan Chase (NYSE:JPM), and Wells Fargo (NYSE:WFC) -- banks that, while hurt, are by and large expected to survive even with current rules in place. Financials like Citigroup and AIG would indeed benefit, but their fate is already written in stone, if only because investors already consider them dead or doomed to nationalization.

Bottom line
It's certainly possible, but I honestly don't expect something huge happening this week. Any momentous change to the rules would entail a heated debate between Congress, industry groups, the SEC, and the Financial Accounting Standards Board -- not the kind of thing that gets agreed on over an afternoon chitchat.

Even so, Washington's mere acknowledgment of this problem is a step in the right direction. Maybe, hopefully, it's a sign of things to come.  

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase is a former Motley Fool Income Investor recommendation. The Motley Fool is investors writing for investors.