WASHINGTON -- Regional bank representatives are warning that the Financial Accounting Standards Board's recent proposal to require banks to value their investments at current market prices could have a major impact on the municipal market, especially small issuers.
They warn that the so-called mark to market plan, which the FASB decided to move forward with last week, could discourage banks from buying longer-term municipal bonds because they would have to hold them to maturity to avoid the new accounting requirement.
The representatives add that the rule could be particularly trouble-some for small issuers around the country that depend on banks to buy their bonds.
The warning came after the seven-member board voted July 15 to require banks, when faced with changing market conditions, to list the value of many bonds and other investments at the current market value rather than at the original market price.
The FASB, however, compromised slightly by proposing that banks be required to revalue their securities only on balance sheets, rather than on both balance sheets and income statements. An earlier draft would have required both.
A so-called exposure draft of the rule is scheduled for release by the financing board at the end of September. Public hearings are likely early next year and a final rule would take effect in late 1993.
But bank representatives contacted yesterday said they still may shy away from longer-term investments to avoid the requirement.
"They've made it sound like it's ~to have and to hold,'" said Bert Madden, senior vice president for investment banking at Sun Trust Bank in Atlanta. "You can't even get a divorce," he said, referring to the fact that banks would be reluctant to get rid of holdings if they have to mark them to market on balance sheets. "Portfolios, after all, have always been there for liquidity."
Mr. Madden, like other bankers interviewed yesterday, said the rule would not have an immediate impact for him because his bank's portfolio, at least for now, is invested heavily in shorter term debt. But the rule would limit the bank's choices in the future, he said
"It's not going to make a great deal of difference because of the makeup of our portfolio," he said, adding, "We'd like to think that in time we'd like to be long."
Marti Sworobuk, director of bank operations for the Independent Bankers Association of America, said the proposed mark-to-market standard would discourage local, less frequently traded offerings.
"If you are dealing in a local issuer, like a school bond that's generally nonrated, there will be a disincentive to purchase those. Any broker dealing with those will experience a setback in their business because there isn't a readily available market value on them," she said
But Ms. Sworobuk predicted that the financing board will not stray from its plan. "I don't think we are going to be able to talk them out of it," she said.
"It seems that present-value accounting is the movement in the future," she added, noting the proposal has the strong backing of Securities and Exchange Commission Chairman Richard Breeden.
Said Philip Peters, executive vice president of Boatmen's BancsharesInc., headquartered in St. Louis, "We have concluded that for better or worse" the firm is not going to change its investment strategy. "We'll have to do whatever we have to do. We are not going to let a regulation that we think is ridiculous in terms of having any practical utility get in the way of our making legitimate business decisions in the best interest of our shareholders."
But he warned that the rule will eventually take its toll. "What will happen is that bank investment portfolios will become shorter in average life rather than longer. They are going to shorten up as time goes on to avoid volatility to earnings that would become associated with price changes in longer maturities."
"And the question is," he added, "who is going to be there to buy those longer-term government and municipal securities when banks are no longer going to be there? We think it's a bad proposal."
Said Ralph Horn, president and chief operating officer of First Tennessee National Corp., "It will be a real damaging blow to the small issuers all over the country that depend on banks to buy their bonds."
"This will push the industry even further to shorter maturities," warned William O'Halloran, senior vice president and controller for SunTrust, who chairs the American Bankers Association's accounting committee. "Banks are just not willing to take that kind of risk.
"Let's say a bank is at or just over its minimum net capital and all of a sudden rates skyrocket. The value of their securities obviously goes down. They have a loss in their portfolio. That's why the ABA's position has always been that this just adds another degree of volatility in bank financial statements."
Marianna Maffucci, vice president and general counsel of the Public Securities Association, said her group has not completed its analysis of the FASB plan.