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Bank Collapse Prompts Another Look at Fair-Value Accounting for Securities

S.J. Steinhardt
Published Date:
Mar 21, 2023

iStock-826741128 Accounting Standards

The collapse of Silicon Valley Bank has prompted members of the banking and investment communities to reconsider accounting rules first considered after the 2008-09 financial crisis but subsequently abandoned after industry objections, The Wall Street Journal reported.

In 2010, the Financial Accounting Standards Board (FASB) proposed requiring banks to record all financial instruments at fair value, or marked to market, to provide investors with more information. Much of the financial crisis resulted from illiquid, toxic subprime assets that had to be marked to market.

Strong industry opposition caused the board to retreat in 2011 and stay with so-called mixed-measurement model, which allows for financial instruments to be treated in a mix of ways.

Banks said that fair-value requirements would have hurt lending. Supporters, who said it would have improved transparency and reveal potential bank weaknesses, included the CFA Institute, the California Public Employees’ Retirement System and the World Bank. They said that fair value was the best measure for financial instruments. 

The current debate concerns rules on held-to-maturity (HTM) securities, instruments that, if designated as such by banks, allow firms to exclude unrealized losses on them from equity as long as they don’t sell. If banks sell any HTM securities, they must reclassify all of their HTM securities as available for sale. That could, potentially, lead to big losses on unsold securities.

Silicon Valley Bank designated 43 percent of its total assets as HTM securities, which fell in value and led to a buildup in unrealized losses as interest rates rose last year, the Journal reported. Selling those HTM-branded assets before maturity would have reduced capital to almost nothing, so the bank did not switch the classification to avoid recognizing the losses as it struggled to maintain its liquidity to fund withdrawals.

“Every time there’s stress, the issue comes up,” said, Robert Herz, the FASB’s chair when it issued the 2010 proposal, and who now serves as chairman of Morgan Stanley and Fannie Mae’s audit committees, according to the Journal. “If the FASB were to decide to address the issue, it will likely be very controversial and the same arguments on either side will likely be raised again.”

“I’m OK with the designations as they sit today, but I would not be surprised to see additional conversation about this, particularly given the nature with which [Silicon Valley Bank] managed its balance sheet,” Charles Levingston, chief financial officer at Bethesda, Md.-based Eagle Bancorp Inc., told the Journal.

Brent Beardall, chief executive of Seattle-based bank Washington Federal, disagreed, saying that the current mixed-measurement model only affords investors partial information. He urged the FASB to consider requiring financial institutions to present two balance sheets, one at amortized cost and one at fair value, which would provide comparable information across all classes of assets and liabilities. 

“Fair value is a useful piece of information, but it’s only useful if you get all of the information. Picking and choosing is a disaster,” Brent Beardall, he told the Journal. “I think it’s time that the FASB look at it and provide information to investors the way they want it.” 

Silicon Valley Bank’s billions of dollars in unrealized losses tied to HTM securities would have been clearer to investors if the bank had been obligated to record them at fair value, Sandy Peters, head of financial reporting policy at the CFA Institute, told the Journal.

Likewise, the Council of Institutional Investors believes that fair-value accounting with robust disclosures provides investors with more useful information than amounts that would be reported under amortized cost or other existing alternative accounting approaches, General Counsel Jeff Mahoney told the Journal. He added, however, that the council does not oppose existing accounting standards providing for the categorization of HTM securities.

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