Moving Level 3 Assets to Level 2 Can Unlock Tens of Billions in CRE Value

Back in April Bloomberg put out an article on Level 2 & 3 accounting of bank assets. They wrote: “Unlike Level 1 assets, which have easily viewed market prices, investors have to rely on banks’ internal models, and own judgments, to get a handle on the Level 2 & Level 3 exposure.” Yet now: “Less welcome is that banks will probably have to start moving things from Level 2 to Level 3 as price discovery becomes more difficult. Some may decide that observable measures through mid-to-late February are sufficient to keep assets in the Level 2 pot for the first quarter. Lehman Brothers allegedly shifted mortgage-backed securities & other assets from Level 2 to Level 3 in 2008 in an effort to prop up their values.” Ah, the good ol’ days.

How can we put this: you’re going the wrong way. This is precisely the wrong approach. Moving assets to Level 3 assets allows inputs to the pricing model that are “unobservable” by GAAP accounting definition (ASC 820, FASB 157, IFRS 13). Using new technology that pulls more/better/real-time data and drives more transparency facilitates fully “observable” inputs for data rich seldom traded assets. Better price discovery and the move to a Level 2 asset from Level 3 unlocks tens of billions in CRE value on corporate balance sheets. #VerifiedByInveniam

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