The taming of monetary policy necessary to slow price inflation has triggered a corrective trend in the valuation of financial instruments. Many big banks in the United States have substantially increased their use of an accounting technique that allows them to avoid marking certain assets at their current market value, instead using the face value in their balance sheet calculations. This accounting technique consists of announcing that they intend to hold such assets to maturity.
As of the end of 2022, the bank with the largest amount of assets marked as “held to maturity” relative to capital was Charles Schwab. Apart from being structured as a bank, Charles Schwab is a prominent stockbroker and owns TD Ameritrade, another prominent stockbroker. Charles Schwab had over $173 billion in assets marked as “held to maturity.” Its capital (assets minus liabilities) stood at under $37 billion. At that time, the difference between the market value and face value of assets held to maturity was over $14 billion.
If the accounting technique had not been used the capital would have stood at around $23 billion. This amount is under half the $56 billion Charles Schwab had in capital at the end of 2021. This is also under 15 percent of the amount of assets held to maturity, under 10 percent of securities, and under 5 percent of total assets. An asset ten years from maturity is reduced in present value by 15 percent with a 3 percent increase in the interest rate. An asset twenty years from maturity is reduced in present value by 15 percent with a 1.5 percent increase in the interest rate.