Market Value Accounting

What effect will market value accounting have on banks' financial statements? This report deals with the implications of market value accounting for debt investment securities held by banks. GAO provides information on the (1) composition of bank investment security holdings and their significance in relation to total bank assets, (2) impact of fluctuating interest rates on the market values of bank debt investment security portfolios, and (3) maximum potential effects on earnings and security capital.

GAO found that: (1) as of December 31, 1990, bank investment securities portfolios comprised an average of 18 percent of bank assets, ranging from a high of about 30 percent for banks with less than $100 million in assets, to about 10 percent for the largest banks, those with more than $30 billion in assets; (2) the U.S. Treasury and government-sponsored enterprises issue most of the bank investment securities; (3) approximately 50 percent of the debt securities held by banks with assets over $1 billion had maturities of over 5 years, and less than 30 percent of the debt securities held by banks with assets of less than $1 billion had maturities of over 5 years; (4) an increase of 1 percent in interest rates, combined with an average maturity of 8 years on longer term holdings, would result in a 3-percent decrease in the aggregate value of debt investment securities held by all banks; (5) any combination of rising interest rates and average maturity assumptions would totally or almost totally erase bank earnings if debt investment securities were accounted for at market value; (6) a combination of a 1-percent rise in interest rates and an 8-year average maturity assumption could produce an 8-percent decrease in bank equity capital; and (7) because GAO did not consider the offsetting effects of strategies that banks could use to mitigate the impact of interest rate changes in the value of their securities portfolios, the changes it calculated represented the maximum potential impacts for the industry in the aggregate.