ABA Objects to Accounting Standard Changes

The American Banker's Association has released a white paper detailing it's concerns about the Financial Accounting Standards Board (FASB) and International Accounting Standards Board's (IASB) "direction in which they are heading"; specifically with regards to some major proposed changes to the scope and reach of fair value accounting. I'll start out with an executive summary of the report, and for those like myself who are blessed with performance enhancers and/or thrive on a little bit more detail, I'll pierce through the surface of the report a little more further below.

Executive Summary

The ABA's entire white paper is best summarized by the statement - which is targeted towards the regulatory bodies of course - "Let's slow down a minute". Both of these standard setting boards (FASB in the US and the IASB in Europe/elsewhere) have, in all fairness, proceeded extremely rapidly - especially for a bureaucracy - through the initial stages of rule changes. To further aggravate the situation, each Board is pursuing a somewhat different end-game, which threatens to create a compliance nightmare on elm street. The proposed changes, argues the ABA, would only exacerbate the cyclical nature of banking, thereby introducing unnecessary and inevitable volatility to the Markets. Keep in mind throughout all of this that the ABA is essentially the lobbying arm of the banking industry; it will pursue policies that have the best interest of that industry in mind.

Detail Oriented - Performance Enhancers Recommended

The policies pursued by both the FASB and IASB will expand the use and application of mark-to-market accounting (MTM) in monumental fashion. Most significantly, the proposed rules will require that banks value all loans on it's book according to market pricing. This determination must be made quarterly, and at least insofar as the IASB is concerned, fluctuations in the loan book will be counted towards - or against - net income. This calculation would in fact require an additional line be added to the income statement, indicating the effect of the quarter's MTM determinations. According to the white paper, the FASB is primarily focused on the effect that marking loans to market will have upon a bank's tangible common equity (TCE). TCE is generally hailed as the "purest" measure of a bank's capital adequacy. The ABA is apparently concerned introducing MTM of loans into the TCE equation will force banks to hold an excessive amount of capital as a cushion against losses.

All of this being said, the ABA seems most confident in it's assertion that the two standard setting boards are:

1. Proceeding separately towards different solutions.
2. Failing to exercise "due process" with regards to the rule making process.

On the one hand, it doesn't entirely make sense that the FASB and IASB would be rushing to implement rules that would increase the cyclical nature of banking. On the other hand, I found the ABA's white paper to be somewhat lacking in substantive criticisms of the regulatory proposals; there was a distinct feeling that they were trying to shift the brunt of the attention onto the procedural deficiencies thus far in the process, while only briefly touching on the practical implications. Sphere: Related Content