a good first step toward enhancing measurement guidance in this area. however, as i will discuss in a moment, a number of important issues warrant further consideration, especially before dramatic moves are made toward increased fair value accounting. but before discussing these specific issues, allow me to emphasize one important point. as a bank supervisor, the federal reserve believes that innovations in risk management are very important to the continued improvement of our financial system. new methods and financial instruments allow banking organizations to improve their risk - management practices by selecting target levels of risk exposures and shedding or limiting unwanted positions. whenever possible, the accounting framework should avoid providing a disincentive to better management of risk. fair value measurement issues that warrant further consideration reliability and measurement if markets were liquid and transparent for all assets and liabilities, fair value accounting clearly would be reliable information useful in the decisionmaking process. however, because many assets and liabilities do not have an active market, the inputs and methods for estimating their fair value are more subjective and, therefore, the valuations less reliable. a copy of the letter can be found at www. fasb. org / ocl / 1201 - 100 / 31186. pdf. research by federal reserve staff shows that fair value estimates for bank loans can vary greatly, depending on the valuation inputs and methodology used. for example, observed market rates for corporate bonds and syndicated loans within lower - rated categories have varied by as much as 200 to 500 basis points. such wide ranges occur even in the case of senior bonds and loans when obligors are matched. the fasb statement on the proposed fair value standard suggests that reliability can be significantly enhanced if market inputs are used in valuation. however, because management uses significant judgment in selecting market inputs when market prices are not available, reliability will continue to be an issue. the proposal identifies three levels of estimates, with the lowest priority given to level - 3 estimates. these estimates are not based on quoted prices in active markets for either identical or similar assets or liabilities, but rather on mark - to - model estimates. the proposal suggests that the use of multiple approaches, such as the market, income, and replacement - cost methods, will improve reliability of these estimates. however, the number of approaches adds little to reliability if all the methods are based on the same underlying information, as would often be the case for financial instruments. in our role as a bank supervisor, we have observed that minor changes in a number of assumptions in

may in some cases result in questionable or inappropriate practices, such as including projected income from cross - marketing activities in the valuation of financial instruments. additional guidance to address these issues is warranted. also, consideration must be given to revenue - recognition issues in a fair value regime. we must ensure that unearned revenue is not recognized up front, as it inappropriately was by certain high - tech companies not so long ago. disclosures fair values reflect point estimates and by themselves do not result in transparent financial statements. additional disclosures are necessary to bring meaning to these fair value estimates. fasb ’ s proposal takes a first step toward enhancing fair value disclosures related to the reliability of fair value estimates. i believe that additional types of disclosures should be considered to give users of financial statements a better understanding of the relative reliability of fair value estimates. these disclosures might include key drivers affecting valuations, fair - value - range estimates, and confidence levels. another important disclosure consideration relates to changes in fair value amounts. for example, changes in fair values on securities can arise from movements in interest rates, foreign - currency rates, and credit quality, as well as purchases and sales from the portfolio. for users to understand fair value estimates, i believe that they must be given adequate disclosures about what factors caused the changes in fair value. considerations for credit portfolio management fair value estimates affect the information you use as credit portfolio managers. today ’ s financial statements are based on a mixed - attribute accounting model. this means that an entity ’ s balance sheet may include certain values reported at historical cost and certain values reported at fair value. you probably learned more about this in yesterday ’ s break - out session about managing profit and loss volatility. fair values may be used as an analytic tool in the lending process and are compared with historical cost values. this historical cost information, along with associated disclosures, contains reliable information that provides insights into a firm ’ s expected cash flows. as the industry moves toward expanded use of fair value, i believe disclosure of certain historical cost information will remain essential. as i mentioned earlier, the reliability of the valuations and the transparency of the methods and inputs used to calculate the values are critically important. clearly, fair valuations will have an impact on leverage ratios, capital ratios, and other ratios used in the lending and credit - management process. credit portfolio managers will need to identify and understand the impact of changes in fair value estimates that result from changes in specific factors