Thursday, April 30, 2009

FASB ‘Close’ on Off-Balance-Sheet Change, Herz Says

Posted on Bloomberg by Ian Katz:

The Financial Accounting Standards Board is “pretty close” to approving rules on off-balance- sheet accounting that will force banks to add billions of dollars of assets to their books, Chairman Robert Herz said.

Rules that let the companies keep assets and liabilities including mortgages and credit-card receivables off their balance sheets “were stretched,” Herz said today at an accounting conference at Baruch College in New York. The changes would take effect next year, he said.

U.S. bank regulators examining finances of 19 large banks calculated that the institutions would record $900 billion in off-balance-sheet assets in 2010, according to a Federal Reserve report released April 24 as part of the so-called stress tests. The Fed based its calculation on data provided by the banks.

In July, FASB postponed by at least a year the effective date of the changes after banks including Citigroup Inc. and trade groups complained. The Securities Industry and Financial Markets Association and the American Securitization Forum said the measure may make companies appear to be short of capital during regulatory reviews.

Investors are wary of a company’s unknown obligations as the world’s biggest banks and brokerages reported more than $1.3 trillion in writedowns and credit losses since the start of 2007, some stemming from losses at off-balance-sheet vehicles.

Many lenders made profits before the subprime-mortgage market collapsed by selling pools of loans to off-balance-sheet trusts, which repackaged the pools into mortgage-backed securities. Some banks then sold those securities to other off- balance-sheet vehicles they sponsored, concealing from investors that the securities were backed by souring mortgages.

The Fed report last week was part of the U.S. government effort to restore public confidence in banks, some of which have reported that capital was “substantially reduced” by the recession and financial crisis. Results from the bank tests are due for release as soon as May 4.

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