A measure of performance of a company that may not only depends on the efficiency of the company itself but also on the market where it operates. In the financial sector, it also known as financial stability or financial health. There are different financial measures that can be used in order to evaluate the performance of a company. Some of the common financial measures are: revenue, return on equity, return on assets, profit margin, sales growth, capital adequacy, liquidity ratio, and stock prices, among others.Depending on the industry on which the company operates, some financial ratios will be more meaningful than others. For instance, in a manufacturing company, total unit sales, return on assets and inventory turnover may be key ratios to monitor, while for financial institutions, stock prices, cash flow, revenue and operating income may the key ratios to monitor. For companies in the consulting business, return on assets and inventory turnover may not be meaningful given the fact that it is not an asset intensive industry. Another factor to consider in order to evaluate the performance of a company is the relative value of the financial measures of the company in relation to competitors within the same specific industry, because each industry is unique and making comparison across industries may provide bias interpretation about the performance of a company. For instance, comparing return on assets between a manufacturing company and a consulting company may be meaningless because while one of them is asset intensive, the other one is not.In the case of U.S. financial institutions, the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA) provide deposit insurance to guarantee the money of clients kept at the corresponding financial institutions (banks or credit unions). In the case of the FDIC, it provides deposit insurance up to $250,000 in an insured bank, while in the case of NCUA provides insurance protection up to $250, 000 in a federally insured credit union. FDIC and NCUA also provide quarterly financial performance reports that are publicly available. In addition to the data provided by the FDIC and NCUA, some public rankings of banks are prepared using data provided by SNL Financial, which is a company based in Virginia that specifically collects financial and market variables related to the banking industry. Some of the variables collected to measure the financial health of banks are: nonperforming loans (NPLs) as a percentage of loans, nonperforming assets as percentage of assets, and reserves as a percentage of NPLs.
Published in Chapter:
Accounting Standards in the U.S. Banking Industry during the Financial Crisis
Copyright: © 2016
|Pages: 14
DOI: 10.4018/978-1-4666-9484-2.ch007
Abstract
The global financial crisis became evident when U.S. house prices fell related to the subprime mortgage-backed securities crisis. In the years preceding the financial crisis of 2008, there was a real estate bubble that pushed U.S. real estate prices to high levels, and at the same time financial institutions were holding large amounts of subprime mortgage-backed securities. Fair value accounting (FVA) and its link to the recent global financial crisis has been a focus of discussion and interest for accounting researchers, financial analyst and policy makers. During the financial crisis, a large percentage of assets in the balance sheets of banks were calculated using fair value. The main concern was that those assets were calculated using mark-to-model accounting (Goh, Ng, & Yong 2009). There are still contradictory conclusions on the implications of fair value accounting and the global financial crisis (Laux & Leuz, 2009). The main objective of this chapter is to provide a better understanding of the global financial crisis and of the mechanisms of fair value accounting.