Financial firms warn accounting change could threaten recovery

Financial and real estate interests are making a strong push for federal regulators to delay the implementation of a new accounting rule set to take effect at the beginning of next year.

The rule bans the use of controversial financial entities that allowed firms to shift risks away from their bottom lines. Before the financial crisis, banks and other financial firms relied heavily on special financial vehicles to support the booming market for securities based on residential, commercial and other loans.


By using “qualifying special purpose entities,” banks benefited from not having to maintain more capital to offset the risk in the assets. The special vehicles and their assets were “off balance sheet” and did not appear to affect the banks’ core business.

Industry groups are now lobbying federal financial regulators to delay the implementation of any change in capital requirements resulting from the new accounting rule. They argue the economy continues to struggle and the change could threaten signs of improvement in the financial sector.

The rule was approved earlier this year by the Financial Accounting Standards Board (FASB), the nonprofit organization that sets accounting rules, and is slated to take effect Jan. 1.

The nation’s biggest banks and real estate interests are leading the charge in the effort because the securitization process for residential and commercial loans relied heavily on the special vehicles.

When federal regulators stress-tested the country’s 19 largest financial institutions this spring, they concluded that the accounting rule could shift $900 billion in assets onto bank balance sheets.

That shift would require firms to increase capital to meet regulatory obligations, although the stress-test results took those requirements into account. The new requirements would affect all banks, not just the 19 largest. Industry groups say the rule could force banks to raise tens of billions of dollars in new capital.

John Courson, president and chief executive officer of the Mortgage Bankers Association (MBA), said the accounting rule “may hinder the current economic recovery under way.”

MBA and the Commercial Mortgage Securities Association (CMSA) filed a comment letter to federal regulators last week. Lobbying associations also have made a strong push that the regulations should be delayed because the association that sets international accounting standards has yet to come out with a similar rule.

“This should serve as further reason to delay the regulatory capital impact,” said Dottie Cunningham, chief executive officer of the CMSA.

The Financial Services Roundtable, which includes the 100 largest financial firms, supports delaying the rule, said Melissa Netram, the association’s director of regulatory affairs.

The American Securitization Forum, another lobbying association, is seeking a six-month delay in any change to capital requirements, or at least a phase-in period.

“With any increase in required capital, a banking institution is likely to reduce the amount of lending using such securitization vehicles, as well as other lending,” the American Bankers Association wrote in a letter to regulators. The association, the nation’s biggest banking lobby, suggested that any transition period should be three years at least, with no change in regulatory capital impact in the first year.

In a letter to regulators, Capital One bank said it is still difficult to raise capital in private markets and that the change might lead firms to reduce lending. “This runs counter to the government’s attempts to increase available liquidity and capital to the industry,” the firm said.

The lobbying push comes several months after an industry coalition, the Financial Instruments Reporting and Convergence Alliance (FIRCA), was formed to tackle an array of accounting debates, including the issue of off-balance-sheet rules.

The coalition is led by the U.S. Chamber of Commerce and has supported a delay in the accounting rule.