Level 1, 2, and 3 Assets (Valuation)

To assess fair (mark-to-market) value on securities carried on banks’ balance sheets for accounting purposes, especially during periods of stress, supervisors have differentiated between Level 1, Level 2 and Level 3 assets. Level 1 assets are those that are liquid and easy to value based on publicly quoted market prices. Level 2 assets are harder to value and can only partially be taken from quoted market prices but they can be reasonably extrapolated based on quoted market prices. Level 3 assets are difficult to value. Their value tends to be internal models-based as there is no observable market for them.