Lawmakers Voice Continued Concern on Role of Accounting in Financial Crisis, Solutions

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Lawmakers continued to voice concerns May 21 that accounting rules requiring the consolidation of items previously kept off the balance sheet might be forcing so many securitized assets onto the books of financial institutions that they are raising capital requirements to levels that unnecessarily curtail lending for home and commercial mortgages.

A Securities and Exchange Commission staff accountant and the chairman of the Financial Accounting Standards Board told a House Financial Services Committee that it is up to banking regulators to determine capital rules independently of accounting standards, which are intended to bring transparency to the financial condition of companies and to accurately portray their underlying economic condition.

The hearing of the panel's Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, continued a dispute over the role accounting standards might have played in the 2008 credit crisis and came against a backdrop of Congress trying to iron out differences in the regulatory reform bills that the House passed in December 2009 (H.R. 4173) and the Senate approved May 20.
 
Rep. John Campbell (R-Calilf.) and Rep. Edward Royce (R-Calif.) worried that the consolidation rules for assets in special purpose entities under Accounting Standard Codification 860 (formerly FAS 166, Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140) and ASC 810 (formerly FAS 167, Amendments to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities) were continuing to crimp real estate markets, especially for commercial real estate.
 
Campbell said the effect will be compounded when the regulatory reform bills become law because they have provisions requiring financial institutions to retain at least a 5 percent interest in loans they securitize. This provision, along with more loans coming back onto balance sheets under ASC 860 and 810, which took effect for most companies Jan. 1, will require ever larger amounts of regulatory capital against them, curtailing liquidity, he said.
 
Royce said the increased capital requirements could prevent financial institutions from rolling over performing loans in the badly hit commercial real estate market.