FDIC Asks for Comments on Impact Of FASB Asset-Consolidation Rules

By Steven Marcy

Federal financial regulators are seeking comment on whether to permit phase-in of the increased capital that many banks will have to achieve as a result of accounting changes on loan transfers and consolidation due to take effect in January.

The Federal Deposit Insurance Corporation Aug. 26 signed off on a notice of proposed rulemaking that is also expected to be cleared soon for publication in the Federal Register by the Office of the Comptroller of the Currency, the Federal Reserve Board, and the Office of Thrift Supervision.

The proposal cleared by the FDIC endorsed the accounting changes, even though they would result in higher capital requirements for affected banks, and found no “compelling reason” to change regulatory capital standards.

However, because of the continuing difficult economic situation, and the need not to have a negative impact on the securitization market, the bank regulators are soliciting comment on whether a “more measured implementation” of the rule is needed.

The proposal is likely to be a disappointment to industry groups that have urged a go-slow approach to implementing the new standards from the Financial Accounting Standards Board as it became clear that the plan would result in banks bringing assets back on the balance sheet, and could impact efforts to restart the securitization market (5 APPR 545, 6/12/09).

Conflicting Pressures

Even as investors have argued for accounting revisions to clarify financial institution balance sheets on both the value of financial assets and off-balance-sheet activities, the Financial Accounting Standards Board and the International Accounting Standards Board have been pressured by the financial industry to go easy on any changes while the industry is under such stress. In a response articulated by former SEC Chief Accountant Conrad Hewitt last fall, standards setters have responded that the goal of bank safety and soundness lies with bank regulators, who are able to adjust capital requirements if necessary (4 APPR 1040, 11/28/08).

The two new accounting standards at issue are Statement of Financial Accounting Standard 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140; and FAS 167, Amendments to FASB Interpretation 46(R), approved by FASB June 12 (5 APPR 573, 6/26/09). Together, they will change the way entities account for securitizations and special-purpose entities, requiring many organizations to bring securitized assets back onto their balance sheets. The standards will take effect for calendar-year companies starting Jan. 1, 2010.

An FDIC memo considered at the Aug. 26 meeting states that preliminary analysis indicates that the implementation of FAS 166 and FAS 167 will increase the amount of assets and liabilities reported on some banks' balance sheets and, for some banks, result in significantly higher regulatory capital requirements.

In light of this, the interagency proposal requests comment on the appropriateness of a phase-in of the increase in banks' capital requirements that would result from the implementation of these accounting standards. The notice of proposed rulemaking also requests comment on various matters involving the effect of FAS 166 and FAS 167 on securitizations and related activities by banks and any accounting treatment and risk-based capital requirements involving those activities.

Regulators Endorse New Standards

However, the proposal also states that, as a result of the bank regulators' Supervisory Capital Assessment Program and of other analyses, bank regulators “do not, at this time, find that a compelling reason exists for modifying their regulatory capital requirements to alter the effect of the 2009 [generally accepted accounting principles] modifications on banking organizations' minimum capital requirements.”

The financial regulators noted that the new standards are in alignment with bank regulators' capital-adequacy standards. FDIC members said during their Aug. 26 meeting they agreed with the new FASB rules. The impact of the new FASB standards “generally would result in higher regulatory capital requirements for those banking organizations that must consolidate their [variable interest entities],” the FDIC said.

Saying she “strongly support[s]” the FDIC proposal, FDIC Chairman Sheila Bair said that it is “fair to say” the FASB has issued “an accounting change that needed to be done,” and “I applaud them for moving ahead.”
Still, the banking regulators need to know the impact of the FASB rules on capital requirements, and the pace at which they should require banks to adopt them.

“Recent events underscore the need to create a sustainable securitization market that promotes long-term funding and credit availability in a transparent matter,” Bair said. “Securitizations should be driven by the economics and not just the capital benefits.” But she also said, “I do understand that this [capital] proposal is likely to be significant … and this is a difficult point in our economic cycle.”

She added that the FASB standards could impose “a significant capital charge at a time when the market is just beginning to get its bearings.”

Consequently, the interagency proposal seeking comments on the FASB standards are being issued because “the full impact of these rules have yet to be determined.” So the proposal questions if “a more measured implementation of the rule” is needed “in the event the impact of the rule is determined to be too great to bear immediately in January of next year.”

FDIC Director and Comptroller of the Currency John Dugan noted that the FASB rules will bring “significant” amounts of bank investments back onto their balance sheets, which could require major regulatory capital increases in a short period time. However, he said that overall, “it is appropriate for us to move in that same direction [as FASB] as an initial matter of regulatory capital.”

Dugan also said it is wise that the interagency proposal examine whether different types of investment vehicles should require different types of capital to offset them, and if so, what types.

In one major change from current policy, the proposal would require banks for the first time since 2004 to hold risk-based capital against asset-backed commercial paper programs. The bank regulators had excluded the ABCP programs from risk-based capital requirements because of their belief that these conduits “generally faced limited [credit] risk exposures,” a belief that has since been undermined by the world financial crisis, the FDIC said.