The fair value of loans held by the nation's biggest banks continues to decline, indicating that credit markets have not yet turned around and raising serious questions about the effectiveness of the government's efforts to help the industry through the credit crisis.

In fact, among the banks that were stress-tested in May, the difference between carrying values and fair values grew 14.4% from Dec. 31 to June 30 — to $164.4 billion.

Observers said the data shows that it is getting even more difficult to find buyers for stressed loans and that banks' efforts to jettison bad assets could be delayed. And if the Financial Accounting Standards Board advances a sweeping mark-to-market proposal, some banks might have to raise more capital to close their valuation gaps.

"It is clearly a sign of stress that surprises me," said Tim Yeager, a finance professor at the University of Arkansas and a former economist at the St. Louis Federal Reserve Bank. "I thought by now that we would have turned the corner, but things seem to be getting worse."

Kevin Jacques, a former official at the Office of the Comptroller of the Currency who now is chairman of the finance department at Baldwin-Wallace College, agreed. "There is still difficulty moving assets," he said. "There is still talk of a double-dip recession; unemployment keeps rising, and there is concern over commercial real estate. Put it all together, and it is going to be really difficult to price these loans."

Banking companies disclose the valuation gaps in footnotes to their quarterly filings with the Securities and Exchange Commission. In a table, they compare the portfolio's carrying value — what is on the balance sheet — with the fair value, its estimated market value. The tables in second-quarter filings showed carrying values and fair values at June 30 and Dec. 31.

Observers said the continued fair-value declines are troubling. Among 12 stress-tested banking companies, the fair value of their aggregated loan portfolios fell 5.6% during the first half of 2009, to $3.66 trillion.

Donald Mullineaux, a finance professor at the University of Kentucky, said the decline in fair value can be attributed to lower cash flows as more borrowers default on loans or to higher discounts on loan valuations "due to higher perceived riskiness" in the portfolios. "Either one isn't a good sign for traditional lending," he said.

"Liquidity for loans is still evaporating," which could lead to more declines in fair value and wider gaps if banks continue to hold fast to carrying values, said an accounting executive at a big banking company who asked not to be named. "People just don't have the appetite for loans in an investment portfolio."

Bank of America Corp. reported in its second-quarter filing that its loan portfolio was worth $64.4 billion less than the amount displayed on its balance sheet at June 30. At Wells Fargo & Co., the difference was $34.3 billion, and Regions Financial Corp. had a gap of $22.8 billion. At all three the gaps had grown since Dec. 31.

Scott Silvestri, a spokesman for B of A, said the company plans to hold most of it loans to maturity and that discussions of valuation gaps becomes an "academic exercise." He said that most of the fair-value declines since December stemmed from interest rate movements.

A spokeswoman for Regions said fair-value determinations in a volatile economy involved "highly subjective estimates" and complex variables.

"The accounting rules require fair value to be reported under an exit price or liquidation value even though this is not consistent with Regions' business model and our intention to hold these loans until maturity," she said.

Some companies have been more aggressive in writing down their loans' values, producing carrying values more in line with estimated real values than six months earlier. Citigroup Inc. said its gap was $1.3 billion at June 30, compared with $18.2 billion at yearend 2008. JPMorgan Chase & Co.'s gap shrank to $16.5 billion, from $21.7 billion at Dec. 31.

BB&T Corp. was the only banking company among those that were stress-tested which maintained a carrying value below its estimated real value — a gap of $458 million.

Officials of JPMorgan Chase, BB&T and Citi did not comment.

Yeager said the gaps could influence lending decisions, particularly at banks where fair value is significantly less than carrying value. "The banks with a wider gap may be less willing to take on more risk," he said.

Some observers said the gaps could influence capital decisions, too, particularly in light of a proposal being developed by FASB that could require companies to mark every loan to market. Doing so could cause deeper writedowns and force some companies to go back to investors.

The gaps continue "to be a reflection of the incredible economic times and the problems that have been going on," Jacques said. The Federal Reserve Board "can go in there and pump enormous amounts of liquidity into the markets … , but there is still an awful lot of uncertainty that bankers have to face."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.