Banks lobby to change accounting rule that could cost billions

Nine major financial and real estate lobbying  associations are joining forces to push for a greater say in a series of accounting rule changes, one of which could soon force banks to raise tens of billions of dollars in capital.

A recently adopted accounting rule effective at the beginning of 2010 requires firms to bring off-balance sheet assets onto their own balance sheets. That could mean a costly change to the bottom line of many firms as they would be forced to end a practice that contributed to the risky lending that set off the financial crisis.

Banks and other firms relied heavily on “qualifying special-purpose entities” to securitize residential, commercial and other loans and to keep riskier investments off their balance sheets.

 
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The new industry group, the Financial Instruments Reporting and Convergence Alliance (FIRCA), is interested in a broad array of domestic and international accounting changes, including rules on derivatives, hedges and other financial instruments, said Tom Quaadman, executive director for financial reporting at the U.S. Chamber of Commerce. But the most pressing is the off-balance sheet rule recently made to American accounting standards.

Coalition members would like to see that rule brought into line with international accounting standards.

If domestic regulators were to wait for international standards, that could mean a delay to the rule and a huge relief to financial firms.

Banks argue that the new rule could hurt their business just as the crisis shows signs of easing.

 In addition to the Chamber, the new coalition includes the American Council of Life Insurers, Commercial Mortgage Securities Association, Council of Federal Home Loan Banks, Group of North American Insurance Enterprises, Property Casualty Insurance Association, Real Estate Roundtable, Financial Services Roundtable and Mortgage Bankers Association.

The off-balance sheet change adopted on June 12 by the Financial Accounting Standards Board (FASB), the group that oversees American accounting standards, could lead to nearly $1 trillion in assets moved onto balance sheets, estimated Robert Willens, a corporate tax analyst. That, in turn, could lead regulators to require that firms raise tens of billions of dollars in capital to boost their financial security.

Willens estimated that as much as $80 billion in capital might need to be raised, but regulators have yet to give guidance on the issue.

“It’s a huge deal,” he said. Willens expects that the financial lobby will push hard on the regulators and Congress to delay the change.

“I think at the end of the day this thing will get delayed further,” Willens said. “I think enough pressure will be brought to bear from the politicians.”

A group of 16 trade associations — including the nine in the coalition — on June 1 wrote to Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke and five other federal regulators urging them “to ensure that any sweeping accounting changes are appropriate and not untimely.”

The groups are seeking for domestic accounting changes to be made in line with changes rendered by the International Accounting Standards Board (IASB).

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“If FASB comes up with a standard and IASB doesn’t, it sets up accounting arbitrage,” Quaadman said. “We did not take issue with the principle of the change, but if you’re going to come up with an accounting standard to deal with the financial crisis you really need FASB and IASB to do so jointly.”

The G-20 said in April that standard-setters should make “significant progress toward a single set of high-quality global accounting standards.”

In its plan to overhaul the domestic financial system, the Obama administration underscored that it would like that aim met by the end of the year.