Regulators Propose Accounting Changes as 'Problem' Banks Grow
Bank regulators on Wednesday issued a proposal on new accounting standards that would address the alignment of regulatory capital requirements with the actual risks of certain exposures, including securitized assets. The Federal Reserve, Federal Deposit Insurance Corp. (FDIC), Office of Thrift Supervision (OTS) and Office of the Comptroller of the Currency (OCC) issued the proposal on the standards, which would subject affected banking organizations to higher minimum capital requirements beginning in 2010. The agencies are seeking comment on the proposal within 30 days of its publication within the Federal Register, expected shortly. The standards, Financial Accounting Standards (FAS) No. 166 and No. 167, would modify the general risk-based and advanced risk-based capital adequacy frameworks to elimination the exclusion of certain consolidated asset-backed commercial paper programs from risk-weighted assets, according to the FDIC. The proposal (which can be downloaded here) would also provide a reservation of authority in the general and advanced risk-based capital adequacy frameworks to permit the agencies to require banking organizations to treat entities that ate not consolidated under accounting standards as through they were consolidated for risk-based capital purposes. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IAS”) are addressing industry concerns that fair value accounting and reserving for credit losses need improvement, but the American Bankers Association (ABA) notes the changes may be coming too quickly to properly conduct due diligence. "The rapid paces at which both organizations are working, as well as the directions in which they are heading, are causing some to question whether there is due process in evaluating these important issues," the ABA said in a recent white paper. "Some bankers also question whether such efforts are driven by a search for simplicity, transparency, and accuracy or by an appetite to expand fair value accounting, no matter the implications." Groups argue recent significant changes are pushing for controversial mark-to-market rules, ABA noted. The time frame of such changes also poses a problem, they say, as the IASB plans to finalize much of its standards in 2009, essentially forcing FASB to either follow immediately with no time for due process or risk a lack of international convergence in accounting standards. The agencies' request for comments on proposed accounting rules under FASB comes at the same time the FDIC reports that higher loss provisions led to a combined $3.7bn net loss among insured commercial banks and savings institutions in Q209. The FDIC also said the so-called "problem list" of insured institutions swelled to a 15-year high of 416 institutions carrying $299.8bn in combined assets, from 305 institutions totaling $220bn in the previous quarter. Bad loans drove the heavy quarterly losses; insured institutions added $66.9bn in loan-loss provisions to their reserves during the quarter, a 32.8% increase from the year-ago quarter. The institutions also reported a $3.3bn increase in extraordinary losses, mainly driven by write-downs of asset-backed commercial paper. Net charge-offs continued to rise among FDIC-insured institutions, which charged-off $48.9bn in the quarter, marking a new quarterly record. Charge-offs on single-family mortgages accounted for $4bn of those charge-offs. The FDIC also noted delinquencies rose for the 13th consecutive quarter. Noncurrent loans and leases increased by $41.1bn during Q209, led by single-family mortgages, which were up $15.4bn. Noncurrent home equity loans and junior lien mortgages, however, fell for the first time in three years, declining by $1.7bn and $1.5bn respectively. "Deteriorating loan quality is having the greatest impact on industry earnings as insured institutions continue to set aside reserves to cover loan losses," FDIC chairman Sheila Bair said. "Of all the major earnings components, the amount that insured institutions added to their reserves for loan losses was, by far, the largest drag on industry earnings compared to a year ago." Write to Diana Golobay.