FASB Beats Up the Banks

After a full year of contemplation and consultation, the FASB eliminated qualified special purpose entities (QSPEs).

QSPEs allow banks and other financial institutions and companies to hold asset-based securities off-balance sheet. This move will not likely have a significant impact on earnings in the banking sector, but it will affect capital levels at institutions that sold mortgage and other loans into such securities.

The previously off-balance sheet assets will now show up on the balance sheet at the start of 2010 for most institutions.

While there may be minimal differences in banks' earnings, the impacts on balance sheets will be more significant, possibly requiring banks to increase reserves.

Banks were initially upset by the timing of the initial proposal, which was put off after objections from the American bankers’ Association. The FASB says ABA lobbying will not change the current implementation date.

The ABA continues to lobby for changes to FASB's mark-to-market accounting rules and other than temporary impairment rules. The banks feel that mark-to-market accounting is not the best measurement for many transactions, advocating that the current approach works for assets expected to be sold, but not for assets that are expected to be held, among other issues. Banks have claimed for years that mark-to-market rules force them to place unrealistically low values on illiquid or otherwise difficult to trade assets (known in mark-to-market accounting terms as "Level 3 Financial Instruments".)

Mark-to-market accounting is under increasingly fierce attack by bankers who are lobbying hard for U.S. Congress to suspend or repeal mark to market rules. Bankers blame the rules for the current financial crisis.

Recently the FASB issued changes to accounting rules that would allow looser mark to market accounting. The changes has sparked opposition to the changes from consumer and investor groups that who are advancing their previously expressed arguments that the rules give management (banks?) too much freedom in valuing assets in distressed or illiquid markets.

Opposition comes from such places as the Consumer Federation of America, the CFA Institute and the FASB's Investors Technical Advisory Committee. The opposition may also have an impact on proposed changes to financial institutions' regulatory capital levels, which the banks claim are needed to ease the existing credit crunch and to avoid future credit messes like we have had in the past year.