FASB relaxes accounting rules for banks on assets
Under intense pressure from Congress, accounting rule makers on Thursday voted to give banks more discretion in valuing dicey assets.
The changes to so-called mark-to-market accounting standards could help banks avoid more write-downs on troubled mortgage-backed bonds. Banks also could decide to boost the value of those assets on their balance sheets, which could bolster their finances -- allaying concerns about the need to raise more capital.
Critics say the changes raise the risk that banks will cook their books, understating what they could lose on mortgage bonds and other securities.
In a series of votes, the Financial Accounting Standards Board said banks would, in effect, now have more leeway in deciding that the market value of certain depressed securities was incorrect, allowing the banks to set a higher value on the investments.
The moves by FASB, which oversees U.S. accounting rules, had been expected since mid-March. At a House committee hearing on March 12, FASB Chairman Robert Herz was warned by Rep. Paul E. Kanjorski (D-Pa.) and other committee members that Congress would write its own mark-to-market rules if FASB didn’t relax them.
The controversy over the accounting standards has been building since the credit crisis exploded. Banks complained to Congress that overly strict rules since November 2007 have required them to write down the value of many mortgage-related securities to unrealistically grim levels -- in turn ravaging their balance sheets.
The perceived market value of those securities has been severely depressed, in part by ballooning defaults on the underlying mortgages but also because investors have simply shied away from trading the securities, making them difficult to price.
Banks have asserted that many of the securities will pay decent returns in time, and that it was misleading to carry them on the books at prices they would fetch in desperation market sales.
FASB said banks could base their accounting for assets on prices that would be received in “an orderly transaction,” rather than at distressed prices. But the board also said banks couldn’t completely ignore distressed market prices in their calculations.
The American Bankers Assn. cheered FASB’s move. “Today’s decision should improve information for investors by providing more accurate estimates of market values,” said ABA President Edward Yingling.
Investor groups that opposed the changes, however, have warned of the potential for banks to be too sunny in setting asset values.
They also said Congress’ pressure on FASB set a dangerous precedent.
The Investors’ Working Group, a panel of experts sponsored by the Council of Institutional Investors, said the political heat on FASB was “unacceptable and very troubling.”
But some banks sought to dispel the idea that they would immediately mark up depressed assets.
Citigroup Inc. said the FASB decision “will have no impact” on the bank’s financial statements “or our existing practices for determining fair value.” Bank of America Corp. chief Ken Lewis told CNBC that any boost to earnings from the shift would be a matter of pennies per share.
Still, some analysts said major banks were certain to benefit from having more discretion in valuing troubled securities.
“It may not have an [immediate] effect on earnings, but it certainly will on capital levels,” said Robert Willens, who heads tax advisory firm Robert Willens LLC in New York.
Others, however, said investors would recognize if banks were suddenly overly optimistic about valuing certain assets, and would assess the companies’ earnings and balance sheets more critically.
As yet unclear is whether banks’ ability to mark up mortgage securities might cripple the Obama administration’s new program aimed at encouraging banks to get rid of dicey assets by selling them to government-funded private investor groups.