June 24, 2024

Banks, investors need change in accounting rules for US bonds

2 min read
Banks, investors need change in accounting rules for US bonds
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Following the collapse of Silicon Valley Bank (SVB), bank executives and investors are renewing calls to change US accounting rules on held-to-maturity (HTM) bonds. The move was considered after the 2008 financial crisis, but was largely abandoned after hundreds of objections from the banking industry.

Under the current rule, banks are required to hold HTM bonds at either the borrowed price or an adjusted version of the original price they paid. Securities that banks plan to sell must be classified as available-for-sale (AFS) securities and valued at fair market value (FMV).

To sell HTM securities, the bank must reclassify all HTM securities as available for sale and book a capital loss on unsold securities.

SVB classified about 43% of its assets as HTM bonds, which fell in value and led to unrealized losses last year as interest rates rose at the fastest pace in US history.

Selling these HTM-rated assets—mostly mortgage-backed securities (MBS)—before maturity will reduce your equity to almost nothing.

But as SVB struggled to maintain its cash flow, the bank managed not to recognize the loss without changing the valuation approved by its auditor, KPMG.

The collapse of SVB, the largest bank to fail since the 2008 financial crisis, is a reminder of the accounting problems that plagued that period.

The Financial Accounting Standards Board (FASB), which sets accounting rules for US companies, proposed in 2010 that banks should record all financial instruments at fair value or mark-to-market (MTM), a move to provide more information to investors. Developments in the financial crisis.

This issue was already discussed after the savings and loan crisis in the early 1990s. “Anytime there’s stress, there’s a problem,” said Robert Herz, who served as chairman of the FASB when the 2010 proposal was released.

“If the FASB decides to address this matter, it will be very controversial and the same arguments will be raised again from both sides,” said Herz, who chairs the audit committees of Morgan Stanley and Fannie Mae.

Source: Dow Jones Newswires.

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