Samir’s Selection 02/17/2016 (p.m.)
Obama’s Options for a Supreme Court Nominee, and the Potential Fallout >>>
Don’t always believe a balance sheet >>>
You will not find these figures for derivative exposures in the balance sheets of banks nor do such exposures enter directly into capital adequacy calculations. The apparent lack of impact on balance sheet totals is the product of the combination of fair value accounting and the tradition of judging the security of a bank by the size of its credit exposure (counterparty risk) rather than its economic exposure (loss from market fluctuation).The fair value today of an agreement that has an equal chance of you paying me £100 or me paying you £100 is zero. Since your promise to pay or receive £100 is marked to market at nil there is no credit risk: you cannot default on a liability to pay nothing.Under generally accepted accounting principles in the US, you are allowed even to net out exposures to the same counter party in declaring your derivative position. This is not permitted under international financial reporting standards, which is why the balance sheets of American banks appear (misleadingly) to be smaller than those of similar European institutions.
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