Market value accounting for commercial banks
The purpose of this article is to examine
the costs and benefits of market value accounting.
I focus the discussion on the case of commercial
banks; however, much of the analysis
presented could be applied to other types of
financial intermediaries. Many of the issues
discussed here have been examined in greater
detail in the chapter on market value accounting
in the 1991 U.S. Treasury study on reforming
the financial system. After a discussion of
the purposes served by an accounting system
for banks, I explain how HCA misrepresents
the true economic value of financial institu
tions. Next, the commercial bank balance sheet
is examined in detail both to explain how market
value accounting would work and to evaluate
the difficulty of marking to market various balance
sheet items. Once it is known which balance
sheet items are most difficult to value, it is
then possible to assess how costly the move to
MVA would be and whether the cost-benefit
tradeoff for market value accounting is different
for large banks than for smaller institutions. I
then discuss the major criticisms raised about
MVA. The issues raised by both sides imply
that there may be some middle ground, so I
explore possibilities for improving the system of
reporting that does not require a complete move
to market value accounting. The article concludes
by making suggestions for improving the
quality of information provided by commercial
banks to both bank regulators and the public.