Accounting for interest rate futures in bank asset-liability management
✍ Scribed by Laurie S. Goodman; Martha J. Langer
- Publisher
- John Wiley and Sons
- Year
- 1983
- Tongue
- English
- Weight
- 879 KB
- Volume
- 3
- Category
- Article
- ISSN
- 0270-7314
No coin nor oath required. For personal study only.
✦ Synopsis
any commercial banks use financial futures to hedge their dealer and M trading operations. These institutions do not, however, use financial futures extensively for asset-liability management. Unfavorable accounting rules is one of the reasons often mentioned for the limited use of futures in balance sheet hedging. Bankers claim that under current accounting rules, by hedging a maturity mismatch the bank may be increasing the volatility of its reported earnings. This article discusses the implications of current accounting rules and then analyzes the implications of alternative accounting regimes, including those recently proposed by the Financial Accounting Standards Board.
Section I summarizes the results of surveys which indicate the extent to which accounting rules have deterred banks from using futures in asset-liability management. Section I1 discusses from a theoretical viewpoint the current accounting treatment versus some form of deferral accounting in terms of balance sheet impact. Section I11 analyzes alternative accounting regimes and their advantages and disadvantages. Section IV presents the conclusions.
I. BANK USE OF FUTURES AND CURRENT ACCOUNTING
RULES--SURVEY DATA
It is very difEcult to assess the effect of current accounting rules on bank use of futures. Survey data do, however, generally indicate that accounting rules are an important impediment to bank use of futures, although there are a myriad of other factors which also contribute to the banks' decisions not to use futures. Two recent The view expressed in this article are strictly the authors and do not necessarily reflect the opinions of the Federal Reserve Bank of New York, the Board of Governors of the Federal Reserve System, or Metropolitan Life Insurance Company.