The Federal FInancial Institutions Examination Council.Is developing a call report schedule for banks, thrifts and credit unions that would require the entire balance sheet to be reported quarterly on a market value basis.
The call report schedule will not replace existing reporting mechanisms or necessarily require any entries to be made through the earnings account or as an adjustment to capital. according to a top official in one FFIEC member agency.
FFIEC comprises the Office of the Comptroller of the Currency. the Federal Deposit Insurance Corporation, Federal Reserve Board, Office of Thrift Supervision and the National Credit Union/administration.
The schedule is being developed in parallel with Statement of FinancialAccountmg Standards 107, which requires disclosure of the market value of all financial instruments. Statement 107, which the Financial Accounting Standards Board approved as a final rule in December last year, will be applied as a supplement to 1992 balance sheet, income and cash flow statements.
Call reports help regulators keep track of the income and financial condition of each financial institution at the end of every quarter.
'This call report schedule will have some reference to how to go about calculating market value for some liabilities,' said the official. who requested anonymity. However. the procedure is not going to be so precise as to allow reporting entities some flexibility in obtaining market values for their assets and liabilities, he added.
The official sought to debunk rumors that FFIEC agencies do not intend to implement an FDIC Improvement Act provision requiring regulators to develop a 'method' for insured institutions to provide supplementary fair value disclosure of their assets and liabilities.
The rumors caused House Banking Committee Chairman Henry B. Gonzalez. D-Texas. to ask regulators what they were doing in this area. particularly about procedures for obtaining fair market values of real estate assets.
'It is essential that banks disclose the fair market value of their non-performing real estate loans and foreclosed real estate,' Gonzalez wrote to the heads of the FFIEC member agencies. "I do not want the regulators to use the excuse that this provision can not be implemented because [the banks, thrifts and credit unions] do not know how much their estate is really worth. [They] are quite knowledgeable about this. having made use of real estate appraisals for years. whenever they make real estate loans.'
A market value approach creates problems for financial institutions when there is no ready market for the asset. This would require making certain assumptions to arrive at a market value. which is imprecise. Critics argue that such a number. when grouped with other subjective results. still would not give an accurate picture of the institution's financial condition.
However. FFIEC already opened the door for market value accounting in February with the issuance of Joint policy statement regarding depository institutions' securities investments. Under those rules. banks and thrifts are required to carry their investment account at lower of-cost -or-market-value-which the Securities and Exchange Commission lately has required some banks to do after finding unusually large turnovers in their investment accounts.
'A lot of entities are getting to the point where. between their examinations and audits. they are pushed into creating the (Locom) account to satisfy the FFIEC requirement.' the official said. 'That is market value accounting right there.'
The regulators' plan takes financial institutions a step closer to full market value accounting in that the entire balance sheet--assets and liabilities--would be marked to market. though only for call report purposes. The bankers and the insurers have opposed plans to impose a comprehensive market value accounting model to replace the mixed attribute, predominantly historical cost model for financial reporting.--George Brooks
