Financial futures, bank portfolio risk, and accounting

✍ Scribed by Michael R. Asay; Gisela A. Gonzalez; Benjamin Wolkowitz

• Publisher: John Wiley and Sons
• Year: 1981
• Tongue: English
• Weight: 727 KB
• Volume: 1
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990010404

✦ Synopsis

the three federal bank regulatory agencies (i.e., 0 the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency) issued uniform guidelines applicable to commercial and mutual savings bank participation in financial futures and forward and standby contracts.' These guidelines became effective on January 1, 1980.

The guidelines have a number of provisions which basically can be divided into two major components: the internal management aspect and the accounting requirements. To the extent there has been any comment on the first component of these guidelines, it has generally been agreed that they encourage prudent managerial controls which should facilitate the use of financial futures by banks.2 The accounting guidelines have generated the opposite reaction. Indeed, it has been argued that banks have been discouraged from using futures contracts by the accounting standards, at least in the context of their investment activities. The problem is that the accounting standards require that a bank mark its futures contracts 'Actually the Office of the Comptroller of the Currency revised its Circular 79 to conform to the guidelines of the two other agencies. There are some differences among the agency statements, but these differences are more a matter of style than of substance. The guidelines do not distinguish among the various ways in which a commitment can he made for future delivery of a security. Although futures and forward contracts are in many respects interchangeable, standby contracts are more akin to put options than to either futures or forward contracts. This article is concerned with bank use of futures contracts; however, much of the analysis is applicable to forward contracts as well.