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.