Dressed in disguise: how accounting rules hide the flaws of the fractional reserve banking system

Written by Jason Meyers, lead architect of Auditchain Labs AG

Bank failures have put accounting rules in the spotlight; the public now sees how they cover up the capital base of banks and distrust for the centralised fractional reserve banking system is at an all-time low.

Bitcoin, accounting rules and bank failures are also raising fresh concerns about the soundness of fiat money itself. As interest rates rise, the debt securities on the books of banks experience declines in value. This is known as the materialisation of interest rate risk. To manage this risk, banks may choose to account for certain debt securities using the ‘Hold to Maturity’ (HTM) accounting classification. While this classification may provide some benefits to banks, it is clearly dangerous to depositors to banks with smaller balance sheets. HTM classification allows banks to hold certain debt securities on their balance sheet at cost, rather than at market value. This means that if interest rates rise and the market value of the bonds fall, the bank is not required to mark …