Potentially Disruptive Lender Rule Is Delayed
Thursday, July 31, 2008
The board that sets accounting rules for U.S. corporations yesterday postponed by a year a plan that could require banks and other financial services companies to raise mountains of new capital to protect themselves against financial exposures not currently reflected on their balance sheets.
The Financial Accounting Standards Board took the action at the urging of federal regulators concerned about the potential impact on Fannie Mae and Freddie Mac, the mortgage funding giants, and lenders that provide credit for businesses and consumers.
"It does pain me to allow something that has been . . . abused by certain folks, to let that go on another year," Robert H. Herz, chairman of FASB, said at yesterday's meeting.
The action was the latest in a series of moves by regulators to shore up major financial institutions and keep their vulnerabilities from causing near-term damage to the ailing economy.
But even as FASB voted unanimously to stretch the timetable for the proposed accounting change, some members of the board expressed discomfort with the delay.
"In my mind, things have been broken for a while, and it's about time we fixed the problem," FASB member Lawrence W. Smith said at the meeting.
The plan, which would require corporations to move onto their balance sheets what could amount to trillions of dollars of assets and liabilities, was intended to give the investing public a clearer view of companies' financial risks.
Financial institutions routinely pool assets including mortgages, car loans, student loans and credit card receivables into securities that are kept off their balance sheets.
The problem for such financial institutions is that moving the investments to their balance sheets could require them to maintain larger financial cushions, known as capital. Under the best of circumstances, holding more capital can undercut profitability. In the current environment of tight credit and depressed share prices for financial companies, raising capital can be costly and difficult and can dilute the value of existing shareholders' stock.
Requiring banks to hold more capital also can affect their ability to lend, potentially causing ripple effects for the broader economy.
Fears about the impact on Fannie Mae and Freddie Mac helped fuel a steep decline in their share prices this month.
FASB is still weighing whether it will go through with the accounting change, but yesterday's vote means the soonest it would take effect for most companies would be early 2010. In the meantime, starting next year, companies would be required to disclose in financial reports such information as the maximum extent of their off-balance-sheet exposures.
Based on communications with bank regulators and the Office of Federal Housing Enterprise Oversight, which oversees Fannie Mae and Freddie Mac, FASB officials said they worried that their original schedule would not leave regulators enough time to adjust capital requirements in response to the proposed accounting changes.
Agencies favoring a delay included OFHEO, the Federal Reserve and the Comptroller of the Currency.
In a letter dated July 22, Rep. Spencer Bachus (Ala.), ranking Republican on the House Financial Services Committee, urged FASB to adopt a "more measured and realistic" timetable, saying accounting changes "may have serious unintended consequences." Bachus's letter said regulators have been "attempting to mitigate impacts" on "consumers and the broader economy."
The same phrases appeared in a set of "talking points" from the Capital Consortium, a coalition of financial services industry groups whose members include the Mortgage Bankers Association and the National Association of Realtors. The undated talking points were included in a July 28 submission to FASB by another member of the consortium, the Commercial Mortgage Securities Association.
Also calling on FASB to delay implementation of the plan was Citigroup, which said in a letter that it has ties to more than 7,000 of the entities that could be affected by the proposal.
Based on FASB's history of delayed initiatives, "this thing could get postponed indefinitely," said Robert Willens, a consultant on tax and accounting issues.