US Accounting Standards Still Allow Four Largest Banks To Hide Real Risks, Fueling Push To Converge With International Standards Hot

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Derivatives are like loans; they carry risk. Stricter accounting for them would reveal a better picture of the risk levels as they actually are.
US accounting standards allow banks to account for a smaller portion of their derivatives exposure than their European counterparts.
This means they can keep most of their mortgage-linked bonds off their books. This can cause them to underestimate inherent risks as well as how much capital they need for loan-loss reserves.
Applying international accounting standards for derivatives and consolidating mortgage securitizations would double the size of JPMorgan Chase & Co., Bank of America Corp., and Wells Fargo & Co.
Citigroup’s assets would increase by 60%. Off-balance-sheet assets and derivatives were the foundational elements of the 2008 credit crisis.
US accounting standards allow banks to net out the trading positions they have with each other to see what would be owed if all contracts had to be settled on point.
When a bank’s solvency is in question, derivatives partners demand to be paid immediately. This can cause a run.
The accounting differences in the US and international standards lay at the heart of the debate in Basel.
The underlying risks are behind a debate for converging US accounting standards with international ones.

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