Without historical financial statements, financial analysis and evaluation would not be possible and management, board members, investors, and customers would be largely in the dark about how well an organization has done. Pro forma financial statements are similar to historical financial statements in appearance and use, except that they focus on the future instead of the past and are based upon assumptions rather than hard fact. Historical statements should be real, solid, and scientific, while pro forma statements allow management to exercise a certain amount of creativity and flexibility.
Hoover Institution Press Forthcoming. The original version of the remarks is available here. Thank you very much to the Hoover Institution for hosting this important conference and to John Taylor and John Cochrane for inviting me to participate. This topic is both complex and dynamic, especially as both regulation and the implementation of monetary policy continue Changes in balance sheet accounts evolve.
One important issue for us at the Fed, and the one that I will spend some time reflecting on today, is how post-crisis financial regulation, through its incentives for bank behavior, may influence the size and composition of the Federal Reserve's balance sheet in the long run.
Obviously, the whole excessively kaleidoscopic body of financial regulation is admittedly difficult to address in the time we have today, so I will focus on a particular component -- the Liquidity Coverage Ratio LCR--and its link to banks' demand for U.
Besides illuminating this particular issue, I hope my discussion will help illustrate the complexities associated with the interconnection of regulatory and monetary policy issues in general.
Also, let me emphasize at the outset that I will be touching on some issues that the Board and the FOMC are in the process of observing and evaluating and, in some cases, on which we may be far from reaching any final decisions.
As such, my thoughts on these issues are my own and are likely to evolve, benefiting from further discussion and our continued monitoring of bank behavior and financial markets over time. Monetary Policy and the Efficiency of the Financial System Before I delve into the more specific complicated subject of how one type of bank regulation affects the Fed's balance sheet, let me say a few words about financial regulation more generally.
As I have said previously, I view promoting the safety, soundness, and efficiency of the financial system as one of the most important roles of the Board.
Improving efficiency of the financial system is not an isolated goal. The task is to enhance efficiency while maintaining the system's resiliency. Take, for example, the Board's two most recent and material proposals, the stress capital buffer and the enhanced supplementary leverage ratio eSLR.
The proposal to modify the eSLR, in particular, initially raised questions in the minds of some as to whether it would reduce the ability of the banking system to weather shocks. A closer look at the proposal shows that the opposite is true.
The proposed change simply restores the original intent of leverage requirements as a backstop measure to risk-based capital requirements. As we have seen, a leverage requirement that is too high favors high-risk activities and disincentivizes low-risk activities.
We had initially calibrated the leverage ratio at a level that caused it to be the binding constraint for a number of our largest banks. As a result, those banks had an incentive to add risk rather than reduce risk in their portfolios because the capital cost of each additional asset was the same whether it was risky or safe, and the riskier assets would produce the higher return.
The proposed recalibration eliminates this incentive by returning this leverage ratio to a level that is a backstop rather than the driver of decisions at the margin. Yet, because of the complex way our capital regulations work together--with risk-based constraints and stress tests regulating capital at both the operating and holding company levels--this improvement in incentives is obtained with virtually no change in the overall capital requirements of the affected firms.
Taken together, I believe these new rules will maintain the resiliency of the financial system and make our regulation simpler and more risk sensitive. Liquidity Regulations Let me now back up to the time just before the financial crisis and briefly describe the genesis of liquidity regulations for banks.
Banking organizations play a vital role in the economy in serving the financial needs of U. They perform this function in part through the mechanism of maturity transformation--that is, taking in short-term deposits, thereby making a form of short-term, liquid investments available to households and businesses, while providing longer-term credit to these same entities.
This role, however, makes banking firms vulnerable to the potential for rapid, broad-based outflows of their funding a so-called runand these institutions must therefore balance the extent of their profitable maturity transformation against the associated liquidity risks.
Thus, during the crisis, some large banks did not have sufficient liquidity, and liquidity risk management at a broader set of institutions proved inadequate at anticipating and compensating for potential outflows, especially when those outflows occurred rapidly.
With regard to liquidity, the prudential regulations and supervisory programs of the U. And, working closely with other jurisdictions, we have also implemented global liquidity standards for the first time.The balance sheet is a snapshot of the company's financial standing at an instant in time.
The balance sheet shows the company's financial position, what it owns (assets) and what it owes (liabilities and net worth).The "bottom line" of a balance sheet must always balance (i.e. assets = liabilities + net worth). The individual elements of a balance sheet .
Goodwill in accounting is an intangible asset that arises when a buyer acquires an existing business. Goodwill represents assets that are not separately identifiable.
Goodwill does not include identifiable assets that are capable of being separated or divided from the entity and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract. The Governance & Culture Reform hub is designed to foster discussion about corporate governance and the reform of culture and behavior in the financial services industry.
D:\pdf\Varbnkdoc 2 Value at Risk Analysis of a Bank's Balance Sheet. A. Background. Value-at-Risk (VaR) has been widely used for banks’ trading portfolios and for risk management.
A few years ago, in rather significant fashion, the U.S. Bureau of Economic Analysis announced a change to the way it estimates gross domestic product (GDP).
Going forward, it was going to include. How to Make a Balance Sheet for Accounting. In this Article: Article Summary Setting Up Your Balance Sheet Preparing the Assets Section Preparing the Liabilities Section Calculating Owner's Equity and Totals Community Q&A Along with the income statement and the statement of cash flows, the balance sheet is one of the main financial statements of a business.