WASHINGTON - The Financial Accounting Standards Board formally released a draft plan yesterday that would require banks to value their investment securities, including some municipal bonds, at their current market value rather than their original market price.
Under the board's so-called mark-to-market proposal, however, banks could continue to report at the original purchase price those bonds that they intend to hold to maturity.
The proposal, which has drawn strong opposition from municipal industry leaders, has been under consideration by the board for months and was formally approved for release July 15. If adopted, it would take effect sometime in 1994. Comments are due Dec. 8 and public hearings are scheduled for Dec. 18 and Jan. 7 and 8.
Under the proposal, called an "exposure draft," securities would be classified in one of the following three categories:
* "Held to maturity," which are debt securities that a firm has a "positive intent and ability" to hold to maturity and that would be reported at amortized cost:
* "Trading securities," which are debt and equity securities that are held for current resale. They would be reported at fair value, with unrealized gains and losses included in earnings.
* "Securities available for sale," which are debt and equity securities that are neither held to maturity nor trading securities. They would be reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate part of shareholders' equity.
Robert Wilkins, manager of the mark-to-market project at FASB, said, "Securities that might be sold in response to changes in interest rates, changes in prepayment risks, increases in loan demand, or other similar factors could not be considered as [being held to maturity] under the proposal."
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, including municipal bonds, Treasury bonds, and mortgage securities.
Critics of the current accounting system charge that it leads to delays in recognizing bank loans that have gone sour and has caused the amount of losses to be understated.
As a result, there is growing interest among regulators, particularly the Securities and Exchange Commission, which urged the board to take additional steps to launch its proposed program of market-value accounting.
"If banks are forced to write municipal bond holdings to market through their income statements or capital accounts, they simply will not buy municipal bonds that have fixed rates and medium- or long-range maturities," Ralph Horn, president of First Tennessee National Corp., warned recently.
That is "because major swings in interest rates would create major swings in reported earnings," he said. "They will only buy floating-rate or short-term fixed-rate securities."
One copy of the exposure draft is available free of charge until Dec. 8 from the FASB Order Dept., 401 Merritt 7, P.O. Box 5116, Norwalk, Conn. 06856-5116.