Working Paper

Relationship loans and regulatory capital: why fair-value accounting is inappropriate for bank loans

Abstract: Banks have been required to report many securities and all derivatives at fair values under U.S. GAAP rules for many years. Soon, International Accounting Standards will provide some banks with a ?fair-value option? for loans, also. A similar movement toward applying fair values to loans may occur in the U.S. in the near future, too. ; This paper argues that fair-value accounting is inappropriate for banks? relationship loans from the standpoint of safety-and-soundness supervision?that is, for the purposes of calculating a bank?s regulatory capital. The argument is straightforward, although perhaps not obvious.

Keywords: Bank loans; Bank capital; Bank supervision;

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Supervisory Policy Analysis Working Papers

Publication Date: 2006

Number: 2006-02