Fighting the industry tide, some of the nation's biggest banks are supporting a plan to meld market value accounting into regulatory capital.
Citicorp, Chase Manhattan Corp., Bane One Corp., and Barnett Banks Inc. are arguing that regulations will be more consistent once the accounting standard is incorporated into capital calculations.
Financial Accounting Standard 115, issued in May 1993, requires banks to place a current market value on assets that will not be held to maturity. The four banking and thrift agencies have each proposed similar rules that would force bankers to include unrealized gains and losses on assets available for sale in Tier 1 capital.
Comments were collected at the three banking agencies over the past seven months. The final comments were due at the Office of Thrift Supervision last week.
Regulators fought the new standard while the Financial Accounting Standards Board was crafting it, but they are now forced to write regulations covering it. As interest rates climbed this year, many bankers turned against the plan as well.
Higher rates lower the value of these securities held for sale. Being forced to include those paper losses, would drag Tier 1 down. Other regulations, such as prompt correction action, are triggered when capital falls. There are other pitfalls. The less capital a bank has, the more it pays for deposit insurance.
But Lester J. Stephens Jr., Chase's senior vice president and controller, said his bank has already adjusted its investment management strategies to accommodate FAS 115.
"Chase has shortened the maturity structure of securities it is willing to hold and more actively uses derivatives to hedge the market value of securities," he wrote in a comment letter to the Comptroller's office.
A survey last spring by Ernst & Young reported that nearly 60% of bank and thrift executives have or will change their investment strategies in response to the accounting rule.
"This wasn't that complicated an issue from our point of view," Mr. Stephens said in an interview. The more discrepancies between generally accepted and regulatory accounting principles, the more confusing it is, he said. "The principle is GAAP-RAP conformity." The proposal may cause unfavorable swings in some banks' capital, Mr. Stephens acknowledged, but he's not worried about Chase.
Roger W. Trupin, Citibank's controller, said including the accounting standard in regulatory capital would avoid unnecessary regulatory burden.
In his letter to regulators, Mr. Trupin said Citibank favors the proposal because it meets the Federal Deposit Insurance Corporation Improvement Act requirement that regulatory accounting principles be no less stringent than generally accepted accounting principles.
Only five of the 66 letters submitted to the Comptroller's office supported the proposal.
William C. Leiter, senior vice president at Bane One, said adopting an accounting standard more lenient than GAAP could tarnish banks' credibility.
Nancy Kesler, Barnett's director of regulatory relations said: "We believe this represents a positive step toward consistency in financial reporting."
Ms. Kesler also recommended the adoption of separate definitions for acceptable capital limits for banks with a high proportion of investments marked available for sale.
Joining the giants in support of the rule was Lebanon Valley National Bank, Lebanon, Pa.
"The adoption of this proposed rule should reduce the cost of compliance for us, since the regulatory reporting would be identical to the general accounting records," wrote Kurt A. Phillips, the bank's chief financial officer.