In the FT, Ben McLannahan reports about a change in US accounting standards concerning the valuation of bank debt.
Under the rules in place since 2007
banks were allowed to use market prices when valuing their own debt, meaning they could book profits when their debt fell in value and losses when it rose.
Particularly during the financial crisis this led to sizable effects of swings in debt prices on bank profits. Under pressure from financial institutions, the Financial Accounting Standards Board “threw in the towel” and follows the International Accounting Standards Board which already backtracked in 2014. Under the new rules the debt valuation adjustments are expected to become more or less irrelevant.
The intention of the 2007 rules was clear:
… if banks were going to book their assets at market value, rather than cost, they should also book their liabilities at market value. Companies should therefore be allowed to recognise gains when the value of their bonds fell below par, the FASB reasoned, on the assumption that they would be able to buy them back at a discount.
But this implied that banks “booked income in bad times and expenses in good times.”