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Key change in accounting may boost banks' balance sheets

Under the new ‘mark-to-market’ rule, banks can consider the value of assets as if they are being sold in an orderly fashion, not in a distress sale.

By Ron SchererStaff writer / April 2, 2009

Both Treasury Secretary Timothy Geithner (left) and Federal Reserve Chairman Ben Bernanke (center) have commented recently on the 'mark-to-market' rule. Mr. Geithner said he had reservations about some of the proposed changes, and Mr. Bernanke noted that it's 'a very difficult question.' They are shown here at a congressional hearing last month on another subject.

Kevin Lamarque/Reuters

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New York

For months, America’s financial system has been buffeted by uncertainty over the value of banks’ assets, which are generally written down to whatever the markets say they are worth – even if they are barely traded since no one wants to own them.

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On Thursday, the group that makes the nation’s accounting rules announced it is modifying this key provision, termed mark-to-market. It will now allow banks to consider the value of assets as if they are being sold in an orderly fashion, not in a distress sale.

This modification by the Financial Accounting Standards Board (FASB) is likely to have wide ramifications. With one accounting rule change, the banks’ balance sheets may look stronger. Possibly, the huge injection of taxpayer money for the banks may seem less risky. However, some investor groups warned that the rule change may make it harder for banks to attract capital in the future, if the value of the banks’ portfolios is viewed as subjective. And some are saying that the change must not be viewed negatively by the public.

“It’s important the American people believe this is just not an artificial change in policy that will cover up some asset that should be shown in some other way,” says Donald Powell, a former chairman of the Federal Deposit Insurance Corp., which insures bank deposits. “I want the American people to believe in the banking industry.”

The FASB action is in response to a congressional demand issued at a hearing last month to modify the mark-to-market rules – or risk Congress becoming involved. This has prompted some concern that FASB is setting accounting rules in response to political pressure.

The timing of the change is important. The US Treasury recently announced it will try to put together a public-private partnership to take up to $1 trillion in bad assets off the banks’ books. “This could make the auctions more successful” for the banks, says Bob Brusca, an economist at Fact & Opinion Economics in New York. “Now, the banks have a chance to get these assets off their books at a better price.”

Also, the Federal Reserve is completing stress tests of the banks to determine if they will need additional capital if the economy goes into a deeper slide.

The financial services industry says it’s not entirely happy with the FASB change. Last month, the industry thought that FASB would give it more flexibility to set up proper valuation, says Irving Daniels, a vice president for banking and securities at the Financial Services Roundtable, a lobbying group that represents the industry in Washington. “It looks like FASB has regressed on how to properly value assets now, and that’s hugely critical. It’s hard to determine now what is what.”

But some Wall Street analysts thought the change would benefit the financial firms. “Companies can therefore exercise significant judgement around asset values for many securities in current market conditions, which could significantly boost reported results for banks,” wrote Julia Coronado, an analyst at Barclays Capital in New York. “The new rules are in effect for [the second quarter of 2009] but may be applied retroactively to [the first quarter of 2009], results for which will begin to be released in two weeks.”

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