Marking A Loan Portfolio To Market Will Be Bad For Banking
Founder and Managing Director of Bradway Research LLC, Bill Bradway, when writing for Bank Systems & Technology, takes issue with the Financial Accounting Standards Board’s (FASB) efforts to expand banks’ use of mark-to-market accounting when valuing loans.
Aside from the risk of devaluation of the loans and the impact on capitalization, four questions Mr. Bradway raises are:
- What is the market value if the loan is current and has always been current?
- What loan underwriting variables need to be revalued? The borrower’s capacity to repay? The borrower’s latest credit score or rating? The value of the collateral underlying the loan? Two of the three? All three?
- Where do you start the mark-to-market process for a portfolio of loans?
- What technology applications are available to help value the loans? Compiling Excel spreadsheets would require an extraordinary commitment of time and resources.
Mr. Bradway then observes, “For all this effort, the mark to market portfolio of loans will not produce any more cash income as long as the borrower complies with the terms of the loan.”
This points out the problem with mark-to-market–isn’t a bond a loan? It is a loan, in a security form. Just because it has a cusip, does it deserve different or worse treatment?