Loan Commitments: Issues Related to Pricing, Trading, and Accounting

A letter report issued by the Government Accountability Office with an abstract that begins "Federal banking regulators reported that commercial banks held about $1.6 trillion in syndicated loans in 2003. Loan commitments--a promise to make a set amount of credit available in the future--represented $1 trillion (about 64 percent) of these loans. Issues have been raised whether commercial banks systematically underprice loan commitments and whether generally accepted accounting principles provide meaningful disclosure of the economics of these commitments. This report discusses (1) differences between the pricing of loan commitments and loans, and assesses data that are available about the trading of loan commitments; (2) the extent to which credit default swaps are used to reduce the credit risk from loan commitments, and what credit default swap prices indicate about the prices of loan commitments; and (3) differences between commercial and investment banks' accounting treatment of loan commitments, and the strengths and weaknesses of fair value accounting.