WASHINGTON – The regulatory relief bill being considered by Congress would once again insert lawmakers ongoing accounting rules, as it did in the 2009 emergency intervention over mark-to-market accounting for investments, by allowing community banks and credit unions to amortize the losses on the loans over five years.
The bill, called The Communities First Act, would provide a variety of relief for banks, including elimination of annual Gramm-Leach-Bliley Act notices; ease financial disclosures on small banks, and even increase the ability of community banks to qualify as tax-exempt Subchapter S corporations, as well as require the Securities and Exchange Commission to conduct a cost-benefit analysis of generally accepted accounting principles and its controversial provisions.
The latest proposal evokes memories of the April 2009 in the middle of the meltdown on Wall Street and among corporate credit unions when Congress convinced the Financial Accounting Standards Board to ease mark-to-market accounting rules to delay the recognition of growing losses on mortgage-backed securities.
Now in the midst of the continuing foreclose crisis language in the new bank bill would enable banks with assets of $10 billion or less to amortize mark-to-market losses on impaired loans secured by real estate or on real estate acquired through foreclosure, instead of recognizing the losses all at once for regulatory capital purposes. In each case, the real estate loans would be those originated from 2003 through 2007. As a practical matter, this section would authorize a forbearance program
Another provision of the bill would allow banks to average appraisals on real estate securing loans over a rolling five-year period. It would allow banks to value the collateral of impaired loans based on the five-year average price of the collateral property, rather than on current market valuation.
On critic of the proposal called it “voodoo accounting.” The provision “would allow for “zombie banks” to avoid prompt corrective action notices by artificially inflating their capital,” Adam Levitan, a professor of law at Georgetown University, said during a hearing on the bill yesterday. “A critical lesson from the S&L crisis was that we should never permit zombie banks to operate-once a bank is insolvent, it should be shut down lest it “gamble on resurrection” by investing in riskier assets in the hopes of a payoff that will return it to solvency.”
“If a bank isn’t solvent based on GAAP accounting, it shouldn’t be operating,” said Prof. Levitan. “There is no reason to make exceptions to this common sense principle.”
