The Financial Accounting Standards Board yesterday signaled that it would continue clearing the way for banks to hedge their interest rate risks with derivatives. “Hedge accounting” allows banks to greatly reduce the financial statement volatility of derivatives, though many banks currently avoid the practice due to onerous documentation requirements. However, FASB in 2016 issued a proposal that would soften by the eligibility and documentation requirements of hedge accounting. Based on recent feedback from ABA member banks of all sizes, FASB has decided to further expand hedge accounting opportunities even further.
This decision by FASB will likely benefit banks of all sizes by allowing them to have their risk management activities better reflected in their financial statements and save significant time that would otherwise be spent on documentation, ABA said. For example, accounting requirements in hedging certain mortgage loans and securities may result in little incremental work on top of asset-liability management procedures already performed by banks.
The final standard is likely to be issued in mid-2017, with an effective date yet to be determined. Read ABA’s comment letter on the FASB proposal.