The global financial crisis has forced changes in rules and regulations governing the banking industry. These will likely follow some important policy decisions that came out of several major meetings last week including the G-20 summit in London. First, in the United States, an industry body announced a major change to accounting rules that would give banks more flexibility on how they value toxic assets.
This would relieve pressure on banks with impaired balance sheets, which has been a major driver in financial market distress.
This is a classic case of U.S. accounting standard-setters bowing to congressional and banking industry pressure and allowing more flexibility in valuing toxic assets that have forced billions of dollars in write-downs.
The five-member Financial Accounting Standards Board voted unanimously to let banks exercise more judgment in mark-to-market accounting, to determine whether a transaction is distressed and a market is inactive.
But in a move that would help many U.S. banks report stronger results, the board split 3-2 in approving guidance that would let lenders take smaller losses on impaired assets available for sale.
The changes would take effect in the second quarter for most U.S. financial firms, but early adoption could be allowed for first quarter results.
Many lawmakers, banks and other supporters of the changes argue that pricing assets to fire-sale prices during a time of inactive markets has exacerbated the financial crisis through the write-downs, big earnings hits, damage to capital ratios, and a reduced ability to lend.
Recently, FASB issued two proposals: one to give banks more flexibility in applying mark-to-market accounting and another addressing when banks must take write-downs on impaired assets.
The guidance will remove artificially downward pressure on asset value and actually help restore the economy. In considering the proposals on Thursday, FASB said the objective of mark-to-market, or fair value accounting, in inactive markets should be to determine what an asset could fetch in an "orderly" transaction between market participants. Such an "orderly" transaction would not include distressed transactions or fire-sales.
But some FASB members were unhappy with the easier standard on writing down assets. Board members Marc Siegel and Thomas Linsmeier cast dissenting votes on the new guidance for how companies write-down assets that have dropped significantly in value.
They are afraid that this change will result in fewer impairments being recognized, and that will not help the investor confidence in the balance sheet. It is clear that the board was making changes to address regulatory capital concerns.
Some investors, however, take an opposing view, saying that more flexibility with the rules would let big banks hide the real value of their toxic assets.
And some critics, who specialize in tax and accounting issues, argued the changes will help banks cosmetically and increase their capital levels.
At last week’s G20 summit, global leaders pledged a new world order with a more heavily regulated financial industry and turned the page on the Anglo-Saxon model of free markets by placing stricter limits on hedge funds and other financiers. To make amends and to try to avoid a repeat of the crisis, they pledged to impose stronger restraints on hedge funds, credit rating companies, risk-taking by banks and executive pay.
In addition, a new Financial Stability Board will be established to unite regulators and join the IMF in providing early warnings of potential threats. Once the economy recovers, work will begin on new rules aimed at avoiding excessive leverage and forcing banks to put more money aside during good times. World leaders also agreed to publish a blacklist of tax havens that could lead to sanctions. There will be an end to tax havens that do not transfer information on request. The banking secrecy of the past will eventually have to come to an end.
Financial institutions in Thailand should study these developments and prepare themselves for possible new rules and regulations that may be applied in the future.
By Chodechai Suwanaporn email: [email protected]
Source: Fiscal Policy Office / www.fpo.go.th