Shortly after SVB, FASB Changed Accounting Rules to Protect Banks

https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/ref_aem/contractmodifications/22reclassificationorsale.html

I’m not even going to put a title on that. You should read it.

Shortly after the SVB crisis, the FASB changed a very important accounting rule. See, securities at a bank are classified as either Available for Sale (AFS) or Held to Maturity (HTM).

The primary difference is AFS securities are market to market (i.e. their value changes on the balance sheet) while HTM securities are not. That meaning, losses on HTM securities do not present themselves during quarterly earnings calls. Furthermore, HTM securities cannot be sold.

Now, almost all commercial real estate (CRE) holdings are classified as HTM, among many other assets that have lost a ton of value in this high interest rate environment. So these losses,?estimated at $620 billion, are hidden from anyone since they are not reported on earnings.

Except, after SVB, along came the FASB and made a change:

A reporting entity may make a one-time election prior to December 31, 2024 to sell or reclassify (or both sell and reclassify) debt securities classified as held-to-maturity (HTM) to either available-for-sale (AFS) or trading pursuant to?ASC 848-10-35-1.

This essentially gives banks a get out of jail free card to be able to sell these HTM securities which goes against the entire point of classifying them as HTM.

This is the loophole they will use to get out of the current crisis we are in since they will be able to sell these securities and recognize the loss.

And of course…we all know the Fed will be buying all of this up.