The standard requires companies to value assets they hold at current market values. For assets that are frozen and have a diminished current market value but may recover value in the future, the standard has proven problematic. Companies are then forced to write-down billions in assets, which can lead to further write-downs elsewhere.
“Illiquid markets have resulted in great difficulty in valuing sizable assets. Some have therefore complained about fair value accounting and sought to eliminate it. While companies need stability, investors still need accurate information. We therefore cannot allow for fantasy accounting that wishes away bad assets by merely concealing them,” said Chairman Kanjorski. “As a result, we will seek at this hearing to engage in a constructive, thoughtful conversation with a diverse range of viewpoints aimed at identifying fair-minded, incremental, and achievable fixes to this problem. In short, I want to find a way – within the existing independent standard-setting structure – to still provide investors with the information needed to make effective decisions without continuing to impose undue burdens on financial institutions. Each of our anticipated witnesses will have the opportunity to contribute as we all pursue consensus solutions together to this thorny, contentious issue.”
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~~~~ ” ….Paul Boyle, chief executive of the Financial Reporting Council, told the Treasury Committee that there should be a separation between the way accounting rules and capital requirements operate, similar to the way corporate profits are calculated differently for tax and accounting purposes. “The purpose of accounting is to present an unbiased picture of the financial health of the organization. The purpose of prudential regulation is biased, and it is properly biased,” testified Boyle.
He asserted that banking regulation needs to be biased to protect depositors and insurance policyholders, whereas accounting needs to foster investor confidence and therefore requires an unbiased treatment. “They have different objectives, and therefore they can use different numbers,” reasoned Boyle. In fact, bank regulators already use different methodologies to calculate regulatory capital. They start with the financial statements, then adjust them based on their regulatory objectives.
There is precedent in the U.S. for reworking bank regulations to address accounting rulemaking. Witness the changes made after FIN 46 was issued. FIN 46 is the rule that required companies to consolidate special purpose entities in many case, and was issued to deal with the abuse of SPEs.
When FASB issued the new rule interpretation it caused plenty of problems for banks, the most prolific users of the vehicles. Indeed, banks engaged in a mad scramble to avoid consolidating SPEs holding more than a trillion dollars worth of securitized assets on their balance sheets.
Ironically, FIN 46 also seemed to require deconsolidation of trust preferred securities. The problem for the banks: TRUPS, as they’re called, count towards the regulatory capital that the bank holding companies were required to keep on hand by the Federal Reserve. Deconsolidating them would make some banks fall short.
In 2005, the Federal Reserve Board announced an elegant solution: Accounting rules need not apply to banks. “Although [generally accepted accounting principles inform] the definition of regulatory capital, the Board is not bound to use GAAP accounting concepts in its definition of tier 1 or tier 2 because regulatory capital requirements are regulatory constructs designed to ensure the safety and soundness of banking organizations, not accounting designations established to ensure the transparency of financial statements.”
The ruling went on to note that, “In this regard, the definition of tier 1 capital since the Board adopted its risk-based capital rule in 1989 has differed from GAAP equity in a number of ways.” So there is precedent for holding banks to different standards.
The same notion was not lost on the Members of Parliament yesterday, who were made aware during the hearing that the total assets of some troubled banks were a 50/50 split between risky derivative instruments and loans. One MP asked if the debate on fair value accounting masked the real problem — that banks that were suppose to be lending money, instead got involved in holding and trading complex derivative instruments. He suggested that new regulation may be the answer, a law “a bit like Glass-Steagall” in which financial institutions that are chartered to hold deposits that are protected by the government, “are not allowed to do these things.” ~~~~
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Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises Hearing
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Mark-to-Market Accounting: Practices and Implications |
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| March 12, 2009, 10:00 a.m., 2128 Rayburn House Office Building Capital Markets |
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