Accounting Standards:

Treatment of Asset-Backed Securities

GGD-99-63R: Published: Apr 14, 1999. Publicly Released: Apr 14, 1999.

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Pursuant to a congressional request, GAO provided information on whether the greater discretion allowed to banks as opposed to securities broker/dealers under accounting standards and practices may have resulted in less transparency in the value of asset-backed securities held by banks, focusing on: (1) mortgage-backed securities (MBS); (2) the accounting treatment applied to securities (including MBS) held by banks and broker/dealers; and (3) the accounting for securities holdings by the six largest bank holding companies and whether such holdings might have affected the transparency of financial statements.

GAO noted that: (1) accounting standards allow banks and most other companies to report their securities holdings at either fair value or at amortized cost, depending on the nature of the securities and the purpose for which the securities are held; (2) because fair value reporting generally represents a more current value of reported assets than amortized costs do, assets reported at fair value offer readers of financial statements greater transparency; (3) a review of the securities holdings at the six largest bank holding companies showed that they were reporting the bulk of their securities holdings at fair value; (4) further, between December 1997 and September 1998, these companies' combined holdings of securities reported at amortized cost had declined, and the securities holdings reported at fair value had substantially increased; (5) as a result, the transparency of their securities holdings improved during this period; (6) at the Federal Reserve, officials had reviewed developments in the financial markets through the fourth quarter of 1998 and data on individual entities' securities transactions through the third quarter of 1998; (7) Federal Reserve officials said their review revealed two instances in which account balances changed in a way that might indicate intracompany securities transactions, but they pointed out that the changes could also be attributable to other causes; and (8) they also observed that the reduced liquidity in certain markets in late 1998 was part of a more general phenomenon in which market participants had become very risk averse at that time.

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