The fate of CMOs in banks' held-to-maturity portfolios remains uncertain, even after industry representatives appealed to regulators to clarify language issued by the Federal Financial Institutions examination council April 15. Until the issue is settled, accounting experts are steering bankers away from these high-risk securities.
Industry representatives and regulators sat down May 10 at the Federal Reserve Board to discuss the FFIEC's revision of its Supervisory Statement on Securities Activities and try to solve the problem. The revision allows the divestiture of high-risk securities from held-to-maturity portfolios,aprovision the industry says conflicts with Generally Accepted Accounting Principles.
The Financial Accounting Standards Board's Statement 115, Accounting for Certain Investments in Debt and Equity Securities, requires bankers who hold securities in the held-to-maturity portfolio to have the "positive intent and ability" to hold these assets to maturity. In a staff announcement last November, FASB held firm on its views. Collateralized mortgage obligations must pass muster with banking regulators, if these sometimes high-risk securities do not pass scrutiny under the "stress test," the agencies can force the institution to sell the security.
"We are advising our clients to follow FASB's announcement," Dayton Lierley, a partner at Ernst & Young told Mortgage Marketplace.
The meeting began with regulators explaining their intent in changing the FFIEC policy statement. Industry representatives included members of the Savings and Community Bankers of America, American Bankers Association, the Big Six accounting firms and representatives from the National Association of Home Builders and the National Association of Realtors.
Dorsey Baskin, a partner with Arthur Andersen & Co., outlined the realities of the current public accounting interpretation and Cliff Hope of Citizens Federal Bank in Fort Lauderdale, Fla., explained the rule's financial management impact on the industry. George Engelke of Astoria Federal Savings & Loan in Lake Success, N.Y., offered solutions to the dilemma.
"The magnitude of the problem warranted a meeting of the Big Six accounting firms and the regulators to discuss possible solutions," said Marti Sworobuk ,project manager for SCBA. "The banking industry is caught in the middle of this impasse, which is based on the accountants' interpretation of the FFIEC policy statement in conjunction with FAS 115."
Industry representatives are working on a solution with regulators. Hopefully, they will have come to a resolution by next week. Bankers have been waiting for clarification before they must file first-quarter reports with the SEC and the banking agencies.
