Banks have been required to report many securities and all derivatives at fair values under U.S. GAAP rules for many years. Soon, International Accounting Standards will provide some banks with a “fair-value option” for loans, also. A similar movement toward applying fair values to loans may occur in the U.S. in the near future, too. ; This paper argues that fair-value accounting is inappropriate for banks’ relationship loans from the standpoint of safety-and-soundness supervision—that is, for the purposes of calculating a bank’s regulatory capital. The argument is straightforward, although perhaps not obvious.
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