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 securities market.
They warned that the mark-to-market plan, which the accounting board recently decided to move forward with, could discourage banks from buying longer-term municipal bonds because they would have to hold them to maturity to avoid the new accounting requirement.
Small Issuers Could Be Hurt
The representatives added that the rule could be particularly troublesome for small issuers that depend on banks to buy their bonds.
The warning came after the seven-member board voted on July 15 to require banks, when faced with changing market conditions, to list the value of many bonds and other investment at the current market value rather than at the original market price.
The accounting board, 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.
Timetable for Decision
An "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 ruling would take effect in late 1993.
But bank representatives contacted on Monday 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."
Future Choices Limited
Mr. Madden, like other bankers interviewed, 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. "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 non-rated 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.
Board Seen as Determined
But Ms. Sworobuk predicted that the financing board would 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 that the proposal has the strong backing of Richard Breeden, chairman of the Securities and Exchange Commission.
Said Phillip Peters, executive vice president of Boatmen's Bancshares Inc. 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."
Avoiding Earnings Volatility
But Mr. Peters 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.