The Financial Accounting Standards Board has taken the first step toward extending controversial market value accounting to deposits and other liabilities.

Staffers are expected to have a proposal ready by December. The board then will decide whether to draft a new accounting rule.

Not Likely to Kick In Soon

Market-value accounting of some assets was approved in June, and some banks will adopt it for fourth-quarter reports.

If the board writes similar rules for liabilities, they likely would not go into effect for at least a year.

Banks vehemently protested market value accounting, claiming it would create volatility in their reported earnings and capital.

Seen as Delaying Tactic

They also said that they wanted to be able to mark both assets and liabilities to market.

Some observers, however, said bankers asked for liabilities to be marked to market as a way of delaying the adoption of the new accounting policy.

The adoption of market value accounting for liabilities would mean the reported value of some deposits would rise with rising interest rates, and could increase banks' reported capital levels.

|Most Bankers Totally Disagree'

That could offset the negative effect of marking debt and equity securities to market in a rising rate environment.

But many bankers have cooled to the idea of marking their liabilities to market.

"Most bankers totally disagree with market value accounting for securities," said Donna Fisher, manager of accounting policy for the American Bankers Association.

"I'm not sure that marking the liabilities to market is going to make them feel any better."

No Formal Position

Ms. Fisher said the association does not have a formal position on market value accounting for liabilities, and is waiting to see the Financial Accounting Standard Board staff s proposal.

Some bankers are holding their fire until they see the board's proposal.

Piecemeal Approach Criticized

Ross Annable, senior vice president of First Union, Corp., said that if the board can come up with a satisfactory way of valuing deposits, including those that have no stated maturity, it would be an improvement over the current accounting rules, "but not a final step."

But he added that if the proposal doesn't cover core deposits, he'll be disappointed.

Other bankers said that the Board is making a mistake by continuing to introduce market value accounting piecemeal.

"I don't believe many people in the banking industry would be promoting this as a separate project," said William Roberts, senior vice president and controller at First Chicago Corp.

Unable to Reach Agreement

The Board tried to incorporate the treatment of liabilities into the new rule on assets before it was published, but could not reach an agreement.

Chairman Dennis Beresford said the board is revisiting the issue due to the support shown for including liabilities by banks, insurance companies, and influential Rep. John D. Dingell, D-Mich.

The insurance industry, after losing the battle against market value accounting for assets earlier this year, appears ready to push more vigorously for some type of market value accounting for liabilities.

Longer Maturities

The American Council of Life Insurance is "exploring the feasibility of an acceptable methodology for valuing appropriate insurance liabilities at market," council president Richard Schweiker wrote in a recent letter to the Financial Accounting Standards Board.

Because insurance company assets and liabilities typically have longer maturities than commercial banks', insurance companies could be subject to a bigger loss of capital under current accounting rules if long-term interest rates rise.

Needs 5 Members' Approval

If the board decides to take up the issue of market value accounting for liabilities, it would still be months away from having an impact on banks.

Before any FASB proposal can take effect it must be published for public comment, and then in its final form win support from five members of the seven member board.

The Board has not decided whether to formally pursue the subject, Mr. Beresford said.

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