Proposed U.S. fair value accounting will hit banks’ balance sheets: Fitch |
Date: Friday, June 11, 2010
Author: Investment Executive
If the new fair value accounting treatment proposed by
U.S. accounting standard setters is adopted, banks could face a heavy
hit to their shareholders equity, Fitch Ratings says.
The rating
agency says the most notable change in recently released proposals on
financial instruments from FASB requires most financial instruments,
including loans, to be measured on the balance sheet at fair value.
“This
is a profound accounting change that will affect the reported balance
sheets of most banks in a very significant way, with possible
repercussions on bank analysis and reported bank capital,” says Olu
Sonola, director, Fitch Ratings.
“From a regulatory standpoint,
it remains to be decided what the capital impact will be; however, the
total equity of most banks is set for more volatility,” Fitch says.
Fitch
reports that in a December 2009 study of 20 large commercial banks in
the U.S., loans made up 55% of total assets (although this figure would
be higher for smaller and regional banks), and 98% of those loans are
measured at amortized cost.
Based on Fitch’s review, if the new
proposal for loans was adopted in the third quarter of 2009, it would
result in a decrease in shareholder’s equity of US$130 billion
(approximately 14% of the combined total equity of all the 20 banks
reviewed).
Speaking at a conference of international securities
regulators in Montreal this week, former head of the U.S. Federal
Reserve Board, Paul Volcker, addressed the FASB decision, saying that he
thinks it’s a mistake for the U.S. to deviate from the international
position on this.
Volcker said he hopes that U.S. and
international standard setters can resolve this disagreement soon, so as
not to derail the planned convergence between them.
Also, Fitch says that it believes that
an overhaul of disclosures on the fair value of loans is necessary to
aid transparency. And, “given the potential for a lack of an active and
liquid market for loans, disclosures of meaningful sensitivity analysis
coupled with the methods and significant assumptions used in the
valuation process would be needed to provide a robust and transparent
presentation to be insightful to analysts and investors,” it adds.
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