WASHINGTON -- Bank and thrift regulators plan to drop a proposed accounting rule that could have caused sharp fluctuations in capital levels.
At issue is how banks account for their holdings of securities. Regulators are slicking to a requirement that all insured institutions mark certain securities to their market values, just as other companies must. But the regulators have decided not to apply those standards in calculating capital.
"It means that the industry will not be yo-yoed on their capital based on temporary fluctuations in the bond market," said Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America.
"We are very, very pleased with the regulatory decision," he added.
The Office of the Comptroller of the Currency is set to announce its' decision any day, and the other agencies are expected to follow soon. The agencies are all seeking to implement a mark-to-market rule put forth by the Financial Accounting Standards Board.
Banks and thrifts have campaigned vigorously against applying the rule, known as FAS 115, to regulatory capital. Such a link would tie capital requirements to unrealized gains and losses on securities -- and bankers say that could greatly increase the volatility of capital levels.
In announcing the decision to drop the capital link, one agency head took note of the industry's complaints.
"Requiring banks to use FAS 115 to calculate risk-based capital would have subjected some banks to wide swings in their risk-based capital ratios with no real public benefit," said Comptroller of the Currency Eugene A. Ludwig.
That "could have forced bank regulators to intervene unnecessarily when temporary changes in market interest rates reduced risk-based capital below regulatory minimums."
Agency sources said the other regulators will announce their decision to drop the rule soon.
The Office of Thrift Supervision is the only regulator that has applied the new FASB rules over the past year -- so only thrifts have felt its full effect, It is expected to soon drop that requirement, regulatory sources said.
Marti Sworobuk, program manager for financial management and accounting at the Savings and Community Bankers of AmeriCa, said thrifts were pleased with the decision.
But Ms. Sworobuk cautioned institutions to keep close watch on any unrealized securities losses. While regulators won't add them in to banks' capital levels, they will take them under consideration.
The regulators' welcome decision "does not mean that Safety and soundness examiners aren't going to take into account unrealized losses," she said.
The potential impact of FASB's rule terrified banks over the past year as interest rates shot up. Had the rule applied when they were calculating capital, many would have faced lower capital levels because of unrealized losses in their security portfolios.
Market-Value Accounting Evolves
May 31, 1993:
FASB approves FAS 115, its market-value accounting rule
December 1993:
FDIC, Fed propose rule on
FAS 115
Jan. 1, 1994:
FAS 115 takes effect
May 1994:
OCC proposes rule on FAS 115
June 23, 1994:
OTS proposes rule on FAS 115
