Market Insights & News

14 days ago

Bank Accounting Needs to Evolve After SVB

Accounting rules let Silicon Valley Bank hide interest rate risk. Joao Granja from the University of Chicago and Luigi Zingales found more trouble. By James Early, BBAE CIO

Once upon a time, wars were fought with muskets and bayonets, being a burglar required physically breaking in, and toilet paper didn’t exist (it was invented by a New Yorker in 1857; corn cobs and seashells were prior go-tos).

Once upon another time, bank failures were caused by credit risk. They tended to happen when the economy got bad. But Silicon Valley Banks’s failure, as I mentioned in BBAE’s latest Forbes article, is ushering in a new era.

Its customers had stellar creditworthiness. It failed in a good economy — and because of ostensibly risk-free (more technically credit risk free) securities.

Another reason it failed is that accounting standards let banks partially hide interest rate risk of securities they hope to hold until maturity, and — surprise (or not) — new research from Joao Granja from the University of Chicago finds that the banks with the most to hide make the most use of what’s almost an accounting loophole.

(Incidentally, I just interviewed Joao for BBAE; expect to see our interview video soon.)

Speaking of new research, a fascinating find by Naz Koont (Columbia), Tano Santos (Chicago) and Luigi Zingales (Chicago) is just how flighty digital money is (red line below). I’d expect more and quicker bank runs in the future because of this.

Fund Rate.png

The main rub of my Forbes piece is that old-school accounting standards are enabling forces that destabilize banking and undermine trust. The FASB feels we can’t handle the truth (of using market values instead of adjusted original cost for banks’ held-to-maturity securities), but I tend to think that post-SVB, the cat’s out of the bag, or the toothpaste is out of the tube.

I’m not bashing accounting standards overall, but feel they need to keep up with the times.

Check out my full Forbes article via this link.


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