Banks Balk at Accounting Changes : Securities: Controversial plan would require financial institutions to account for many of the securities they hold at market value.
The Financial Accounting Standards Board gave preliminary approval Tuesday to a controversial rule that would require financial institutions to account for many of the securities they hold at market value.
The board, the chief rule-setting body for the accounting industry, voted 5 to 2 in favor of the proposed rule, which calls for bonds and other debt securities to be included on financial statements at the amount they are worth in the marketplace, not at their initial cost.
Exceptions to the rule would be made if the institution could prove it had the intention and ability to hold a security until it matured.
The Securities and Exchange Commission has been pushing for banks’ securities holdings to be valued at market value, arguing that this would provide a more accurate picture of an institution’s financial condition.
But the board’s action drew immediate fire from the banking and insurance industries, which have vehemently opposed the new rule.
“This is truly a terrible decision they’ve made today,” said Donald G. Ogilvie, executive vice president of the American Bankers Assn.
“It will affect banks significantly, but more importantly, it will affect large segments of our economy and the role banks play in our economy,” he said. “What they have done is taken an accounting decision and made it have an undue impact on the way banks manage their business.”
The banking industry contends that the rule could lead to sharp fluctuations in the value of a bank’s capital--a measure of its financial soundness computed on the basis of assets, including securities.
“It can be very misleading,” Ogilvie said. “It could cause investors to think the bank is in much better shape or much worse shape than it really is.”
Critics say the rule will cause financial institutions to move away from long-term investments. Richard S. Schweiker, president of the American Council of Life Insurance, said it would force life insurers to shift to short-term investments because there would be too much risk in holding long-term bonds that could seesaw in price over time.
But Dennis Beresford, chairman of the Norwalk, Conn.-based accounting board, said the proposal represents a significant improvement over current rules that allow financial institutions to decide how to value a security.
Most banks now split their securities portfolios into “investment securities,” which are valued at their purchase cost, and “trading securities,” valued at current market value.
