Fair value accounting for the Analysis of the role of banks

Abstract: This article is divided into three types of financial instruments, banks, respectively, the fair value measurement of their specific Application in the article as a basis, combined with the SEC "on the transferred market value accounting research" to analyze the results reported at fair value accounting for the role of banks.

Keywords: financial instruments measured at fair value, failed banks

The financial crisis in 2008 triggered a fierce debate about fair value: fair value measurement side insists that only a fair value measurement attribute, and do not constitute a substantial Economic impact, while the other that the fair value measurement is the culprit of the crisis , fair value accounting should be eliminated, return to the historical cost measurement method in this case, the U.S. Securities and Exchange Commission (SEC under the U.S. <<Emergency Economic Stabilization Act of 2008>> request, submitted a document entitled "transferred market accounting research, "the report this article to the article" Report ", based on detailed analysis of the type of banking and financial instruments measured at fair value of financial instruments in different types of Applications, in order to illustrate the fair value of the banks.

First, the banking and financial instrument type and Application of fair value
Different according to holding purposes, the bank's financial instruments can be broadly divided into three categories: First, investments held to maturity, the second is available for sale financial instruments and the third is through profit or loss of financial instruments, including trading financial instruments and most of the derivative financial instruments.

(A) Held to maturity investments
Held to maturity investments are subsequently measured at amortized cost, and only for credit losses was likely to confirm the impairment for assets such as loans, traditional banks generally held to maturity, the implementation of the historical cost accounting in this case, the fair value of credit losses and indirectly by affecting the impact of bank assets, so it is not the main reason for shrinking bank assets. procedure is as follows: When the Economic downturn, the mortgage lending business to the bank assets fair value reduced accordingly, which leads to increased risk of corporate defaults, forcing banks to extract more loan loss provisions, thereby reducing the bank's assets.

(Two available for sale financial instruments
Available for sale financial instruments using fair value accounting, changes in fair value of its capital surplus account of people only, so that changes in fair value of financial instruments only affect the owner's equity, and do not have any impact on current profit and loss and only its fair value of the temporary drop in serious or when impairment losses, provision for impairment. In other words, the unrealized fair value losses only reduce the value to be transient when it is recognized in current period profit or loss.

(Three trading financial instruments and derivative financial instruments
Trading financial instruments, and most of the fair value of derivative financial instruments is to be measured, and its fair value through profit or loss being so, their fair value has a direct impact on net income.

Second, "the study of transferred market value accounting," the report
As of December 1, 2008, the United States a total of 22 banks failed, SEC 22 failed banks in this study for the sample through the collection of data for statistical analysis, the following results:
First, the small-scale failure of banks using the amortized cost of loans continued to account for processing more than 80% of total assets, and there are no continuously to changes in fair value through profit or loss of its assets in investment securities, classified for the fair value of AFS or HTM and reduce non-temporary impairment recognized through the income part of the assets held on behalf of its 5%.

Second, the use of medium-sized bank failure handling amortized cost of loans constitute the majority of assets held by the persistent use of fair value treatment of assets in its statement, the proportion is not important in the investment securities classified as AFS or HTM and the fair reduce the value of non-temporary impairment recognized through the income part of the assets held on behalf of its 6%.

Third, three large-scale bank failures, specifically as follows:
Washington Mutual deal with the use of amortized cost of loans to total assets, 65% -78%; the use of persistent changes in fair value through profit or loss exposure to less than 5% in non-temporary decline in fair value are recognized when loss of investment securities accounted for 8% of total assets.

IndyMac using amortized cost of loans to total assets, handling 35% -50%; the use of persistent changes in fair value of financial assets through profit or loss for 13% of its total assets; classified as AFS, impairment and in loss is recognized when the fair value of investment securities 15% -18% of total assets.

Downey Savings and Loan processing using the amortized cost of loans accounted for 84% of total assets, the use of continuous treatment and its change in fair value through profit or loss does not have significant assets or liabilities of the balance, are classified as AFS and its fair value non-temporary decline to confirm the loss of investment securities to total assets of 9% -12%.

Third, the fair value analysis of the role of banks
22 through analysis of the SEC to study the failed U.S. banks to get objective data, obtained the following revelation: Links to free download http://www.hi138.com
First, the use of amortized cost is still dealing with the assets of failed bank assets constitute a major part of the fair value accounting is not GAAP-based financial reporting banks have an important impact.

Second, the failure of the bank's capital, small and medium size reduction is mainly due to increased credit losses, credit losses increased level of performance of non-performing loans continued to rise. Failed bank's bad loans far exceeds the level of similar size but failed banks experienced the level of non-performing loans, which reflects the interests of banks, driven by ignoring the associated risks.

Third, the failure of the bank's share price changes compared with changes in book value per share that the market failure of the bank's focus on the first major bank to confirm the point of fair value losses, which further indicates that the fair value of the report are not caused by the shrinking of bank assets and its subsequent failure.

References:
1, Ge Shu U.S. SEC "transferred to market accounting research on the" Report Review (b) - Background and Application of the fair value of the United States [J]. Accounting, 2009 (4).

2, Ge Shu U.S. SEC "transferred to market accounting research on the" Report Review (D) - Fair value accounting for the impact of bank failures in 2008 [J]. Accounting, 2009 (6).

3, Cuixian Yu. The sub-prime crisis and the fair value of the [J]. Green accounting, 2010 (6).

4, high printing move. Fair value accounting in the banking crisis in the role analysis [J]. Finance & Accounting, 2010 (6) Links to free download http://www.hi138.com