Bank Commercial Loan Fair Value Practices

53 Pages Posted: 27 Sep 2007

See all articles by John Tschirhart

John Tschirhart

Federal Reserve Bank of New York

James M. O'Brien

Board of Governors of the Federal Reserve System - Trading Risk Analysis Section

Michael Moise

Federal Reserve Bank of New York

Emily Yang

Federal Reserve Bank of New York

Date Written: July 2007

Abstract

Recent accounting changes, for the first time, permit the use of fair value in the primary financial statements for held-to-maturity (HTM) bank loans. While the use of fair value has historically attracted significant discussion and debate, there is little information in the public domain on how banks would measure fair value or use it in loan management. This study presents and analyzes results from in-depth discussions with seven large internationally-active banks on their fair value use and measurement for HTM commercial loans and commitments. The objectives of the discussions and those of the study are to: identify the extent to which fair value is used for HTM commercial loan facilities and how it is used; describe valuation methodologies used and consider the roles of market price sources and modeling and their relative importance in fair value estimation; consider model validation and price verification; draw conclusions as permitted and suggest areas for future research.

Keywords: Commercial banks, Commercial loan fair valuation

JEL Classification: G12, G21, G28

Suggested Citation

Tschirhart, John and O'Brien, James Michael and Moise, Michael and Yang, Emily, Bank Commercial Loan Fair Value Practices (July 2007). FEDS Working Paper No. 2007-29. Available at SSRN: https://ssrn.com/abstract=1017604 or http://dx.doi.org/10.2139/ssrn.1017604

John Tschirhart

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

James Michael O'Brien (Contact Author)

Board of Governors of the Federal Reserve System - Trading Risk Analysis Section ( email )

Washington, DC 20551
United States

Michael Moise

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Emily Yang

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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