Accounting rules that helped U.S. banks list billions of dollars in nominal gains on derivatives in the third quarter of 2011 may force some banks to post losses for that line item in the fourth quarter.
The losses, paradoxically produced because the value of the banks' bonds rose in recent weeks, threaten to knock bank stocks off course just as they are just gaining momentum going into quarterly earnings later this week and next.
That forecast, by specialists at Quantifi Inc., a risk analytics provider, is based on how much banks' bond spreads have changed and the difference in how much it costs to insure that debt using credit default swaps. It doesn't account for changes in currency or interest rates, changes in the size of their derivatives portfolios or the changing creditworthiness of their trading partners.
(Changes in the creditworthiness of trading partners adds a whole other layer of complexity, potentially offsetting some of the effects of DVA. Here, in what is known as a "credit valuation adjustment," a rise in the creditworthiness of trading partners translates into an unrealized gain, because it implies a bank is more likely to collect money owed by those trading partners.)
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