Morgan Stanley increased its use of historical cost accountingfor corporate loan commitments, joining Goldman Sachs Group Inc. inmoving away from the mark-to-market approach the firms had earlierused.

Morgan Stanley raised the amount of loans and lendingcommitments that it accounted for as “held for investment,” or HFI,to $9.7 billion in the fourth quarter from $800 million a yearearlier. Goldman Sachs decided to make the change to some of itscorporate loan book, the Wall Street Journal reported yesterday,citing people familiar with the matter.

Both New York-based firms had losses on relationship lendinglast year and face differing treatment from regulators between HFIand fair-value commitments. Fair-value accounting often requiresfirms to book losses on the commitments, even if they aren't tappedby the borrowers, while commercial bank competitors avoidmark-to-market declines by holding the commitments at historicalcost.

“We are still fanatical believers in mark-to-market,” GoldmanSachs Chief Financial Officer David Viniar said on a conferencecall with analysts last month. “Substantially all of our assetstoday are mark-to-market. Our risk is managed on a mark-to-marketbasis. And whatever we conclude on what I'll call a very smallportion of assets, just relationship lending, those statements willstill be true.”

Morgan Stanley had about $400 million of losses in the thirdquarter from corporate lending, the majority of which is unfundedcommitments. Goldman Sachs had $1 billion in unrealized lossesrelated to relationship lending for 2011. Michael DuVally, aGoldman Sachs spokesman, declined to comment on whether the firmmade a decision on the accounting treatment.

Consideration of the change was also being driven by “moreonerous capital treatment” of mark-to-market commitments comparedto similar HFI assets, Viniar said. Fair-value loans “werepenalized substantially more than HFI loans,” in the FederalReserve's annual review of banks' capital plans, Morgan Stanley CFORuth Porat said last month.

Morgan Stanley is working to increase lending as it gains moredeposits through buying Citigroup's remaining stake in the MorganStanley Smith Barney brokerage, which had $110.6 billion indeposits as of Dec. 31. Total corporate loans and commitments roseto $82.9 billion at the end of 2011 from $69.1 billion a yearearlier.

“Fundamentally, we are a mark-to-market shop,” Porat said lastmonth. “As it relates to the loan book, we obviously have a bank.We're the fifteenth-largest U.S. depository by deposits, and sowe're always considering what makes sense in terms of capital andfunding efficiency.”

Commercial banks helped fight off a proposal last year from theFinancial Accounting Standards Board that sought to make them markloans to market. The panel sets U.S. accounting standards.

Goldman Sachs told Norwalk, Connecticut-based FASB during thecomment period for that proposal that banks hide losses on loansused to generate investment-banking fees and should be required toreport the loans at fair value.

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.