Hedge-Accounting Proposals Promise Flexibility for Depository Institutions

Proposed changes in an accounting standard could give depository institutions greater flexibility to hedge in an uncertain interest-rate environment.

“We’ve got banks that are now hedging both up-rate and down-rate scenarios,” said Adam Byers, director of hedge accounting at Derivative Path. “They need to have that earnings sanity and balance-sheet sanity that comes from hedge accounting.”

The Financial Accounting Standards Board (FASB) is reviewing feedback on three proposed amendments to its hedge accounting standard that were open for public comment until mid-August. They are the latest in a series of targeted changes to FAS 133, “Accounting for Derivative Instruments and Hedging Activities.”

Adam Byers

The most consequential amendment would permit hedge accounting for interest-rate risk in portfolios of held-to-maturity (HTM) debt securities. Without it, prudent risk management strategies can be discouraged, according to the American Bankers Association’s comment letter.

The other proposals would broaden use of the Secured Overnight Financing Rate (SOFR) as a benchmark and expand available net investment hedges.

“The ABA...