“Although [generally accepted accounting principles inform] the definition of regulatory capital, the Board is not bound to use GAAP accounting concepts in its definition of tier 1 or tier 2 because regulatory capital requirements are regulatory constructs designed to ensure the safety and soundness of banking organizations, not accounting designations established to ensure the transparency of financial statements,” said the Fed. “In this regard, the definition of tier 1 capital since the Board adopted its risk-based capital rule in 1989 has differed from GAAP equity in a number of ways.”
Thus, there is precedent for holding banks to different standards.
Next week’s meeting at the FDIC will no doubt address the issue of whether banking regulators should avoid FAS 166 and FAS 167 for capital cushion purposes. Bankers are keeping their fingers crossed.
“We do feel the timing of the standards couldn’t be worse,” says Donna Fisher, senior vice president of tax, accounting, and financial management at American Bankers Assn., a trade group. She says the idea of forcing banks to raise large amounts of capital during the current economic crisis “doesn’t make sense.” If bank regulators do require GAAP reporting, then the ABA would like to see the Fed and others mandate a “net presentation” of assets and liabilities for capital requirements, rather than a “gross up” of the items. In that way, regulators would have the gross numbers to assess, but regulatory capital would be based on the bank’s assessment of its risks, rather than all the assets and liabilities it holds. For instance, the gross number would include all the assets and liabilities the bank has a piece of, regardless of whether it sold off a controlling interest to another entity.
But the problem with the net presentation, according to critics, is that before FAS 166 and FAS 167, complex transaction contracts made it difficult to determine who the controlling party was when the owners of SPEs teetered close to bankruptcy. At worst, banks purposely kept the assets off their balance sheet until the vehicle needed to be bailed out at the expense of bank shareholders.
Still, the ABA says banks are not about to start raising more capital until they hear from regulators whether GAAP reporting applies to their regulatory cushion. Ideally, banks would have liked to have seen FASB and bank regulators come out with rules at the same time, notes Fisher.
But since that opportunity has passed, the ABA is lobbying regulators for a three-year transition period if banks are required to use FAS 166 and FAS 167. During the first year, no additional capital would be required, with new capital requirements phased in over the next two years.