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February 27, 2014

Banks Averting Bond Losses With Accounting Twist: Credit Markets

JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) are leading a shift in how banks account for their bond investments after a $44 billion plunge in value exposed a potential drain on capital under new rules.”

“The largest U.S. lenders are moving assets into the “held-to-maturity” column of their books instead of designating them as “available for sale,” an accounting method that under post-crisis banking regulations allows paper losses to erode measures of their health. The change pushed the share of securities that the five biggest banks keep in the held-to-maturity category to 8.4 percent, the highest in almost two decades, according to Credit Suisse Group AG analysts.”

“Banks are seeking to protect themselves from a weakening of their capital as economists predict bond yields will continue to climb from record lows after their biggest investments, government-backed mortgage securities, posted their first annual losses since 1994. While the strategy may bolster banks’ financial standing, overuse of the accounting method may limit their ability to raise cash to make loans as the economy strengthens and mask risks.”
 

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Read full Bloomberg News article here.

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