Data Analytics

Posted: August 26th, 2021

Data Analytics

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Institutional Affiliation

Data Analytics

Part (a) FASB Codification

1. Debt securities on investment are presented on ASC 320 in the GAAP guidance
2.  ASC 320-10-35 represents impairment losses on debt securities in the GAAP standards.
3. ASC 326-30-30 indicates the sale of debt securities in GAAP guidance. Further, the sale or purchase of debt securities is classified under cash flow from investing activities in the statements of cash flows.

Part (b) Data Analytics

HTM for Large and Small Banks

 The amount held-to-maturity (HTM) for the financial institutions has been increasing gradually within the period under review in response to the 2007-08 global financial crisis. Furthermore, the Basel Committee that focuses on Banking Regulation and Supervision established new banks’ regulatory structure that is known as Basel III. The framework’s primary objectives are to supervise, monitor, reinforce regulations, and risk management in the financial institutions.  However, the structure is voluntary, implying that banks in different countries can choose when and how to implement the legal organization in their countries. The banks’ HTM reservations were initially zero, but they have gradually increased from 31st March 2009 to 31st December 2018. This applies both in large and small banks, as indicated in chart one below.

Additionally, it is also reflected in HTM in Large and small banks, as shown in Figures 2 and 3 below.

Figure 2: HTM for large banks

Figure 3: HTM for small banks

AFS for the Banks                                                                                                                           

The available for sale (AFS) amounts have also increased over the period from 31^stMarch 2009 to 31^stDecember 2018 after the bank regulation rules were put on place. This also applies to both the large and small banks, as shown in Figure 4 below;

Figure 4: AFS for all banks

Figure 5:AFS for Large banks

Figure 6: AFS for small banks

Analysis and Conclusion

When bank regulations and Basel III was introduced in the banking sector, the AFS and HTM amounts of individual banks changed over the periodand reflecting in the whole industry. Furthermore, this is reflected in the above charts for large and small banks, and how the respective bank’s composition on investment portfolio has transformed from 2013 to 2018, that is AFS and HTM investments. Before the reforms, the AOCI component was not included in the regulatory capital calculations, which led to financial institutions suffering from massive unrealized losses in 2007-08 financial crises from the AFS debt investments. Additionally, the regulatory capital was not reflected as they thought it would be a temporary financial risk. Eventually, this misled investors and other stakeholders on the banks’ actual financial position during the crisis.

Consequently, the Federal Reserve Board and Basel III made recommendations for the inclusion of AOCI components in calculating the regulatory capital, which would include unrealized losses and gains on the banks’ AFS debt investments. Additionally, the Federal Board observed that the AFS debt securities’ unrealized losses could be temporary but take longer to reverse. Thus, unrealized losses and gains have a significant effect on the banking capital position that is material enough to impact the banks’ financial position. Therefore, the losses and gains should be included in capital ratios in a particular period. However, the banks noted that using AOCI to calculate the capital ratios in the regulatory capital would lead to volatility from temporary unrealized losses and gains. Therefore, reforms were incorporated in 2012, and from 2013 to 2018, the banks started having minimum bank reserves as highlighted in the data analysis of AFS and HTM. Hence, it is observed that large banks make a higher reserve than small banks.