Value Judgement: New Rules May Roil Banks
Wall Street Journal (10/11/00) Vol. 104, No. 41 p.C1; Sherer, Paul M.

Banks have always held their loans at face value with the assumption that the loans would be repaid in full and with reserves set aside for those that fail. Under the fair value accounting system proposed by the Financial Accounting Standards Board (FASB), bank loans would have to be valued at market price, which means loans could decline in value if the credit rating of the borrower were to decline. If the loan's value were to decline, the bank would then have to report a loss. The proposed switch to fair value accounting would take approximately three to five years to complete. According to the FASB, fair values will represent current economic conditions and expectations, which will make predictions about the future easier and more accurate than those based on face value. These changes are heartily opposed by the banking industry and corporate America, and the Federal Reserve Board has doubts as well. However, despite the opposition, the FASB appears to be confident about the long-term results of the switch and is working toward finalizing the proposed rules.

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