SVB collapse was apparent if you read the footnotes

April 24, 2023

The article “Global regulators take aim at smaller lenders” (Report, April 18) talks about tougher rules to discipline the banks. We wonder whether more transparent accounting would not do the trick. While a close reading by regulators, investors and other stakeholders of the financial statements would have provided sufficient information to conclude that Silicon Valley Bank was bankrupt at July 31 2022, they failed to do so. Why? The information recorded in the “footnotes” to the published accounts is ignored by stakeholders.

While the balance sheet claimed a held-to-maturity asset base of $98.7bn, footnote 13 discloses that the fair value was $84.5bn, reducing the value of equity from $16.2bn recorded on the balance sheet to $2bn, which is far below the equity requirements imposed on banks by the regulator. By the third quarter of 2022, equity had evaporated altogether.

Several research papers have demonstrated that footnotes are ignored. We recommend that the International Accounting Standards Board and Financial Accounting Standards Board invoke the principle where the fair value of assets is recorded on the balance sheet unequivocally, not in footnotes and also not in “other comprehensive income”.

When reading the balance sheet, the user should be able to assume that “what you see is what you get”.

[Letter by Sanjay Bissessur and Jan Bouwens, Accounting Department, University of Amsterdam, The Netherlands]

[The Financial Times]