A proposal in the works at the Financial Accounting Standards Board could put a severe crimp in banks' use of repurchase agreements to raise money and manage interest rate risk, some bankers say.
The accounting board, as part of a major rewrite of its rules on transfers of financial assets, wants to classify all repurchase agreements of longer than three months as sales. At present, "repos" - in which one party sells securities to another and agrees to buy them back at a specified price after a specified time - are treated as collaterized loans.
"What it effectively does is change the fundamentals of the economics of the transaction," said Carlos Mello, senior vice president and controller of People's Bank of Bridgeport, Conn., and chairman of America's Community Bankers' accounting committee. "The real economics of the case is that it's a collateralized borrowing."
The economics matter because when banks and others in need of liquidity pledge securities as part of a collateralized borrowing, they are able to classify the securities as "held to maturity" and do not have to mark them to market prices on a regular basis.
If repurchase agreements are classified as sales, banks would have to mark the securities they sell to market, accounting in their earnings statements for any gains or losses. Also, since they aren't allowed to sell "held to maturity" securities before they mature, banks would either do fewer repos or hold more securities as "available for sale" - which means they must be marked to market.
"This provision will hamstring institutions by limiting the availability of credit, and increase portfolio volatility," ACB lobbyist Marti Sworobuk wrote in an Aug. 30 letter to the accounting standards board.
Ms. Sworobuk and her organization's accounting committee recommended that all repurchase agreements with a duration of less than 75% of the economic life of the security involved be counted as collateralized borrowings.
The American Bankers Association also plans to write to FASB suggesting that all - or at least more - repos be classified as borrowings, said Donna Fisher, the group's tax and accounting director.
In January the accounting standards board proposed that all repurchase agreements be counted as sales. Protests from Wall Street, banks, and big borrowers moved the board to its three-month limit. Ms. Sworobuk is now surveying larger members of her trade group to see how heavily they rely on repos of more than three months.
The repurchase agreement provisions are part of a larger project on "Accounting for Transfers of Financial Assets and Extinguishments," which is due to be released for public comment this month. A "pre-ballot" version was distributed to a few interested parties in August.
The new standards are intended to cope with the rapid growth of asset securitization and the advent of new products, such as interest-only strips, that don't fit into existing accounting rules that treat financial assets as indivisible. The accounting board wants to split financial assets into components, and consider any change in control over one of those components as a sale.
"On the whole, this is a better answer," said William J. Roberts, senior vice president and controller of First National Bank of Chicago and chairman of the ABA accounting committee.
But with big changes come difficulties. Along with their repurchase agreement concerns, bankers also see problems in a provision dealing with servicing rights. The new standards would require banks and other owners of servicing rights for mortgages and credit cards to mark the value of those rights to market.
"That's going to increase the volatility of earnings of mortgage bankers," said Mr. Mello. "It's going to be hard for the investing public to follow what's going on."
