As the Federal Reserve’s interest-rate hikes sent bond prices plunging last year, some of the country’s largest banks used a simple accounting maneuver to help keep billions of dollars of losses from piling up on their books.
They declared that they intended to hold on to large portions of their money-losing bonds until they matured rather than selling them, and they then changed the bonds’ accounting labels accordingly. From then on, the bonds would be frozen in time, no matter how far their values fell in the market.
The Wall Street Journal identified six large U.S. banks including
Charles Schwab Corp.
and
PNC Financial Services Group Inc.
that together switched the classifications on more than $500 billion of their bond investments last year. For some banks, excluding the unrealized losses from their balance sheets allowed them to report robust levels of capital when in reality their assets were worth much less.
The collapse of Silicon Valley Bank has drawn fresh attention to a decades-old debate over the accounting rules. Current rules often let companies show vastly different values for the same assets, depending on what they claim they intend to do with them. In addition, the rules often let companies change their stated intentions midstream, which can have outsize impacts on how healthy their balance sheets look.
The six banks were able to flatter their balance sheets with a flick of the accounting ledger. Banks can hold assets as “available for sale,” which means they are valued using market prices. Another option is to call them “held to maturity,” meaning they won’t be sold. These bonds are held at the banks’ cost. The logic is that daily market prices aren’t relevant to assets that banks wouldn’t sell.
The banks’ held-to-maturity bonds had a combined $1.14 trillion balance-sheet value as of Dec. 31, up from $681 billion a year earlier. The increase was mainly due to the reclassifications.
The $1.14 trillion figure was $118…
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