The Significance of Market Value Analysis For Banks.

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Presentation transcript:

The Significance of Market Value Analysis For Banks

Market Value Analysis  Bank balance sheets ore presented based upon historical cost accounting –Ignores market value changes –MV changes can occur due to other factors –But, interest rate-related MV changes can be isolated relatively easily

Market Value Analysis  A large number of bankers believe that market value changes are irrelevant –They claim that as long as they hold a bond to maturity, it will be worth par at maturity, so interim price changes do not matter  This explanation is flawed –Banks fund assets with liabilities (usually deposits) –The final value of the bond may be known and the interest amount may be know, but the funding cost may vary, so NIM varies

Market Value Analysis  It turns out that the net change in market value s of the asset and funding liability is equal to the present value of future lost net interest margin (NIM)  We know that if the term of the asset is matched by the term of a similarly- structured deposit, the net interest margin is protected for the term  Guess what – market value analysis will reflect this as the MV changes of the asset and liability will be equal, but opposite

Market Value Analysis  So, market value valuation of the entire bank will only change if the bank balance sheet is mismatched.  The net change (MV asset vs MV liability) reflects the change in expected net interest margin due to this mis-match