Fair Value Hedge Accounting
- DCG
- 5 days ago
- 1 min read
The DCG advisory consulting team starts every week with an internal discussion of market trends, regulatory developments, and the real experiences of our bank and credit union clients. Here are the notes from this week’s Monday Morning Meeting.
Check out the meeting notes from previous weeks.
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The focus this week was on evolving opinions and market developments regarding the potential acceptance of fair value hedge accounting using interest rate caps.
Market participants' (accounting firms, FASB, broker-dealers, financial institutions) opinions seem to vary widely from full acceptance to very skeptical and everything in between. Everyone agrees on the economics. Accounting is where the questions arise, as caps are asymmetrical options versus symmetrical options like swaps (universally accepted for fair value hedging).
DCG’s opinion is not varied and is very clear.
The market (extreme volatility) is not waiting for uniform accounting opinions. Financial institutions need to educate themselves on the potential benefits and risks before implementing any strategy, in particular those with varied accounting opinions. Work with external partners (accounting, audit, analysts, etc.) on policy and documentation well in advance of strategic implementation. Educate internal stakeholders on the economics versus the accounting, and assess the risk tolerance of executing a strategy with or without hedge accounting treatment (going ‘naked’).
The more information you have, the better decisions you can make.
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