WASHINGTON - The Financial Accounting Standards Board yesterday agreed to move ahead with a controversial proposal to require banks to value their investment securities, including some municipal bonds, at their current market value rather than their original market price.
But in a compromise in its so-called "mark-to-mark" proposal, the board voted to allow banks to continue to report those bonds at their original purchase price that they intend to hold to maturity.
In addition, for bonds that banks do not plan to hold to maturity, "unrealized gains and losses would not be included in earnings," said Robert Wilkins, manager of the project at FASB. "That means they are shown as a separate component" of shareholders' equity on balance sheets.
Mr. Wilkins said yesterday's vote should be good news for the municipal industry. "The board was talking about requiring mark-to-market for all investments in debt" in earlier discussions, he said in an interview. "Now we are saying you do not have to change current practice if you have a positive intent and ability to hold the bonds to maturity. That is an important change in what the board has been discussing over the last several months."
Municipal industry leaders have warned that imposing market value accounting would have grave effects on the market, by weakening the demand of financial institutions for long-term debt securities. This would include municipal bonds, Treasury bonds, and mortgage securities.
"We were told that many community banks do hold their municipal bonds to maturity, and, therefore, this proposal would not change" current practices for those banks, Mr. Wilkins said. "The good news is that they would not be required to mark those municipals to market value."
Securities and Exchange Commissioner Richard Roberts said in a March speech that a shift to market value accounting should not sap demand for municipal bonds. He said it was tax legislation, and not something like a change in accounting standards, that lessened banks' appetites for municipal bonds in recent years.
Critics of the current accounting system charge that it leads to delays in recognizing banks' soured loans and has caused the amount of the losses to be understand.