Financial and real estate interests won a small delay in the regulatory impact of a new accounting rule that takes effect at the beginning of next year.
The Federal Deposit Insurance Corporation (FDIC) said this week that banks would have up to one year to implement new capital requirements resulting from the accounting rule change.
The move is only a partial victory for banks and other financial interests that have sought to delay the regulatory impact for up to several years.
At issue is a rule banning financial entities that banks used to shift risk away from their bottom lines. The special financial vehicles were off-balance-sheet and helped fuel the boom in securities based on residential, student, commercial and other types of loans.
As the housing market foundered under the weight of bad loans, those securities became troubled assets. Banks benefited before the crisis by not having to maintain more capital to offset the risk.
Private estimates have suggested that as much as $1 trillion in assets would need to be moved onto bank balance sheets, requiring banks to raise tens of billions of dollars in new capital.
“The capital relief we are offering banks for the transition period should ease the impact of this accounting change on banks’ regulatory capital requirements and enable banks to maintain consumer lending and credit availability as they adjust their business practices to the new accounting rules,” Sheila Bair, FDIC chairwoman, said in a statement.
Banks and real estate lobbying interests urged the nation’s bank regulators all year to delay the implementation of new capital requirements. They argued heightened capital requirements would further hamper the securitization market and hurt the economy’s broader recovery.
“They did give a slight bit of relief,” said Michael Gullette, vice president for accounting at the American Bankers Association (ABA). But, he said, “It’s not the answer that we wanted — neither on the transition time period nor on how the risk-based capital rules are being applied.”
ABA had sought a three-year period for the new rules to take effect. Other banks and lobbying trade associations, such as the Mortgage Bankers Association (MBA), sought various forms of a delay in the impact of the rule, which was issued by the Financial Accounting Standards Board (FASB).
The American Securitization Forum, a lobbying trade association, said the new rules should take better account of the different types of risk depending on the transaction instead of taking a “one-size-fits-all” approach.
The accounting change and capital requirements come as House and Senate lawmakers weigh major new restrictions on lenders to keep “skin in the game” by holding some of the risk in the assets.
“It is critical to provide the market and particularly investors who fuel lending with certainty and confidence. This is extraordinarily difficult when there is a wave of new regulatory challenges coupled with unprecedented and retroactive accounting changes,” said Brendan Reilly, senior vice president at the Commercial Mortgage Securities Association.
The House passed a wide-ranging financial overhaul bill last week that included a provision for federal regulators to report to Congress on the combined impact of the new risk retention requirements and new accounting standards.