Academic journal article ABA Banking Journal

FASB Finalizes Market Value Rule

Academic journal article ABA Banking Journal

FASB Finalizes Market Value Rule

Article excerpt

As expected, the Financial Accounting Standards Board issued FASB Statement 115 on June 1, which substantially increases the portion of bank investments that must be marked to market.

Starting in 1994, banks of all sizes must divide their holdings into three categories, and classify newly acquired investments as they go:

(1) Held to maturity: Debt securities they can demonstrate the intent and ability to hold to maturity. If banks can meet this test, they can carry the securities at amortized cost (historical cost adjusted for interim principal repayments).

(2) Trading: Debt and equity securities purchased with the intent to sell them in the near term must be carried at market value, with paper gains or losses included in earnings.

(3) Available for sale: Securities not qualifying for the first two categories must be carried at market value, with paper gains or losses reported as a component of capital.

Strict standards apply to securities the bank wants to classify as investments it plans to hold until maturity. And there are rules for transferring securities from one category to another.

FASB listed five reasons a bank might consider selling something they wanted to carry as held-to-maturity that would disqualify it from that category: (1) to meet liquidity needs; (2) to react to changes in market interest rates and to any effect the rate picture would have on a security's prepayment risk; (3) to shift funds into higher-yielding alternatives; (4) to adjust for shifts in the bank's funding; and (5) to adjust for currency risks. …

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