The tune the accountants are singing about loan accounting is from the same songbook as the politicians, but played in a different key: inaction must be disguised as well-considered action. Actually, though, one FASB member has been doing something. Tom Linsmeier collaborated on a recently-published study* with three professors from Stanford, Michigan and Michigan State:

“Many have argued [principally, the ABA] that financial statements created under an accounting model that measures financial instruments at fair value would not fairly represent a bank’s business model….

We find that leverage measured using the fair values of financial instruments explains significantly more variation in bond yield spreads and bank failure than the other less fair-value-based leverage ratios [under U.S. GAAP or under regulatory rules for “Tier One” capital] in both univariate and multivariate analyses. We also find that the fair value of loans and deposits appear to be the primary sources of incremental explanatory power.” [emphasis added]

Let’s assume, and I have every indication that this is true, that the research yielding the above conclusion is seen to be high quality by business school academia. If so, how could anyone associated with, or acknowledging its quality, support any other accounting treatment besides some version of current value?

The implied answer of Linsmeier et. al. is in the last paragraph of their paper:

The results of our study should not be used in isolation to suggest that all financial instruments should be recognized and measured at fair value. … There are other costs and benefits [to banks] … that we do not consider. Most notably, our study does not address the potential implications that fair value accounting has on procyclicality or contracting.

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