Bank Commercial Loan Fair Value PracticesDivisions of Research & Statistics and Monetary Affairs, Federal Reserve Board, 2007 - Bank loans - 52 pages 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. |
Contents
A BACKGROUND | 4 |
FAIR VALUE MEASUREMENT AND MODELING | 14 |
VALUATION CONTROLS | 32 |
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Common terms and phrases
Adam Copeland Andrew Cohen April BB-rated obligors bond CDS CDS spreads CDSS commercial banks commit drawdown commitment utilization corporate credit exposures credit migration credit quality credit risk curve estimation default probabilities default risk default/survival probabilities EDFs expected loan facility expected payments expected recovery rate facility fair value fair value estimates fair value measurement Federal Reserve high and volatile HTM loan individual obligor curves investment grade Jonathan H June Kevin Moore limited loan balance loan commitment loan facility fair loan facility payments loan fair value loan margin loan recovery rates loan spreads loan-CDS spread differences market credit spreads market price source market spreads maturity MKMV model validation Monetary Policy non-investment grade obligors obligor credit October payments given survival potential prepayment primary financial statements risk premiums risk-neutral secondary market securities firms Spread basis points spread curves syndicated loan Takeshi Kimura Term Structure Tim Bollerslev unused commitment valuation