Monday, May 18, 2009

FASB Rule Will Force Banks to Move Assets Onto Books

Posted on Bloomberg by Ian Katz:

Citigroup Inc. and JPMorgan Chase & Co. will be required starting next year to add billions of dollars of assets and liabilities to their balance sheets under rules approved by the Financial Accounting Standards Board.

The rules, effective for annual reporting periods after Nov. 15, were approved by FASB’s five-member board today during a meeting at the panel’s headquarters in Norwalk, Connecticut. The board, which writes U.S. accounting rules, is overseen by the Securities and Exchange Commission.

Lenders recorded profits before the U.S. subprime mortgage market collapsed in 2007 by selling pooled loans to off-balance- sheet trusts, which repackaged the pools into mortgage-backed securities. Banks then sold those securities to other off- balance-sheet vehicles they sponsored, concealing from investors that the securities were backed by deteriorating mortgages.

“The desire to provide additional transparency to investors was the key driver behind today’s decisions,” FASB spokesman Neal McGarity said in an e-mail.

U.S. regulators said the 19 lenders subjected to stress tests completed this month would have to bring about $900 billion of assets onto their balance sheets because of the FASB changes, according to a Federal Reserve report released April 24. The Fed based its calculation on data provided by the banks.

“This change may have a significant impact on Citigroup’s consolidated financial statements as the company may lose sales treatment for certain assets,” Citigroup said in its annual report released in February. Citigroup spokesman Jon Diat declined to comment.

JPMorgan

In March, JPMorgan estimated in its annual report that the “impact of consolidation” could be as much as $70 billion of credit card receivables, $40 billion of assets related to so- called conduits and $50 billion of other loans, including residential mortgages. Conduits are off-balance-sheet entities that purchase long-term debt and use those securities as collateral to sell short-term debt. JPMorgan spokesman Brian Marchiony declined to comment.

The rule change will hurt banks and the economy by discouraging lending, said Wayne Abernathy, executive vice president at the American Bankers Association in Washington. “It will affect fee income and the economy’s ability to rebound on the lending side,” he said in an interview before the vote.

The FASB vote today eliminates the so-called Qualifying Special Purpose Entity, a type of trust that was exempt from balance-sheet treatment.

Postponed

In July, FASB postponed by at least a year the effective date of the changes after banks and trade groups complained. The Securities Industry and Financial Markets Association and the American Securitization Forum said the measure may make companies appear to be short of capital during regulatory reviews.

Investors are wary of a company’s unknown obligations as the world’s biggest banks and brokerages reported more than $1.4 trillion in writedowns and credit losses since the start of 2007, some stemming from losses in off-balance-sheet vehicles.

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