July 31, 2023
Bloomberg Tax recently published an article featuring Mark Williams, Master Lecturer of Finance, discussing the recent proposal by the Federal Reserve, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency to change capital accounting measures.
When calculating capital ratios, banks with assets of at least $100 billion must include gains or losses in the assets they label “available for sale.” However, the proposal, unveiled by the Federal Reserve, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency on July 27, doesn’t call for changing how banks consider gains or losses on assets they intend to hang onto until they mature or any restrictions on how much money banks can put in this category.
“Overall, the regulator proposal better links capital requirements to the level of bank risk taking, but it doesn’t address the liquidity problems that appeared at SVB, Signature Bank, and First Republic Bank during the spring crisis. SVB proved there needs to be a direct link between held-to-maturity and making sure there’s adequate capital, because clearly there wasn’t for SVB,” notes Williams.
Some financial advisors hoped the new proposal would call attention to held-to-maturity and unrealized losses, however banking regulators appear to be respecting the line between what is their responsibility and what belongs in the purview of accounting standards-setters.