NORWALK, Conn. – The Financial Accounting Standards Board’s proposal to extend market value accounting to long-term assets – including loans – is creating widespread opposition among the lending community, as credit unions and banks see the havoc market value accounting created on the investment side of the ledger over the past two years.
“I have grave concerns about the unintended consequences of the proposed change. Coupling this radical change in financial reporting with the continuing significant economic uncertainty could lead to a further tightening of credit availability,” Lawrence Damm, president of Cessna Employees CU in Wichita, Kan. and a Certified Public Accountant, told the FASB in a comment letter on the proposal.
Jim Blaine, the outspoken president of North Carolina’s State Employees’ CU, was succinct in comment: “Theoretically arrogant; in practice insane; financially negligent and reckless.”
“Other than that, I have no concerns,” wrote Blaine.
The proposal, formally known as Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities, financial statements would incorporate both amortized cost and fair value information about financial instruments held for collection or payment of cash flows. The proposal also aims at providing more timely information on anticipated credit losses to financial statement users by removing the “probable” threshold for recognizing credit losses. It seeks to better portray the results of asset-liability management activities at financial institutions.
But accounting practitioners and financial managers are scoring the proposal as disruptive and potentially dangerous, especially in times of economic turmoil.
Credit unions and banks, they say, would have to be more concerned with market liquidity and other market-related factors rather than the creditworthiness of the borrower since the short-term market value of the loan would be of critical importance. Most of the loans they make, they say, have no readily identifiable market value, confusing investors, depositors and regulators alike.
“We are concerned that marking loans and deposits to market will further confuse our members,” wrote Lisa Lambrecht, vice president of accounting and risk management at Entrust FCU in Richmond, Va. “We basically take deposits from the community and make loans back in the community we serve. We neither sell nor buy any loans.”
Cessna Employees’ Damm noted there are few accurate gauges for the market value of loans on a regular basis. “The current accounting regulations produce much more accuracy in financial statements from the proposed use of hypothetical value ‘as if they were to be sold in a market’ that does not exist,” he wrote. “Without an active market, calculation of this hypothetical valuation would be very subjective and a non-value added activity.”
In its comment letter, Key Corp, the parent of Key Bank, noted that most of the loans made by community or regional banks are to mid-sized and small businesses and there currently is no liquid market for these loans. Determining a fair value for these loans would have to take into consideration the illiquidity for them, creating an artificially low market value, wrote Robert Morris, executive vice president and chief accounting officer for the $94 billion bank.
Noting universal opposition to the proposal among community banks, the Independent Community Bankers Association urged the FASB to pull the proposal. “In our view,” wrote Ann Grochala, vice president of lending and accounting policy for the ICBA, “the accounting that would result if this proposal went forward would greatly misrepresent the operations of community banks and many other financial institutions whose primary business practice is to hold financial instruments to collect contractual cash flows, not to trade them on a regular basis.”
CUNA and NAFCU are expected to submit comment letters in the coming days, as is NCUA, which is joining the FDIC and other banking regulators for its comment.
The 90-day comment period on the proposal ends Sept. 30.
The latest FASB proposal comes just months after banks and credit unions – especially corporate credit unions – were forced by the crash in the credit markets to devalue their investments, including trillions of dollars worth of mortgage-backed securities, causing an upheaval that has yet to abate. The market value rules caused such an uproar that Congress forced the FASB to amend the rules last spring to ease the impact of the economic upheaval.
