Depository institution regulators have once again questioned the attempt to impose market value accounting on investments.

While their critique will not by itself head off the imposition of market value accounting, it may lend some weight to the attempt of banks and thrifts to make such requirements less onerous than they might be.

The comments were contained in a massive report, Study on Regulatory Burden, which also made several recommendations for changes that would affect real estate finance.

The report, ordered by the Federal Deposit Insurance Corporation Improvement Act of 1991, was prepared by the Federal Financial Institutions Examination Council, which comprises regulators of the bank, thrift and credit union industries.

The report noted that the Securities and Exchange Commission has urged the Financial Accounting Standards Board to develop standards that, in their current form, would require debt and equity securities to be reported at market value unless an institution has the intent and ability to hold them to maturity.

"This is an attempt to be partially responsive to the SEC and to address abusive accounting practices," the report said. "Some believe market value accounting could increase volatility in earnings and impair credit availability. Others believe that market value accounting is consistent with an operating strategy that includes selling securities to manage income and interest rate risk."

The report noted that the regulators have been working with the Treasury Department to alert FASB to their concerns.

"Reliable market values are not available for a large portion of a banking organization's assets, liabilities and off-balance sheet commitments, and reasonably specific standards have not been developed for the estimation of market values.

"Thus, any market value estimates would be subjective and subject to error. The overall cost and reporting burden associated with developing reliable market value estimates could also be considerable. Furthermore, market value accounting could increase the volatility in reported earnings and capital.

"A picemeal application of market value accounting for a significant portion of the bank balance sheet (such as all or a substantial component of investment securities) and not for all balance sheet and off-balance sheet items could result in a volatility in reported earnings and capital that may not be indicative of the bank's true financial condition."

A change to market value accounting, warned the regulators, "could have a major impact on the investing, lending and other activities of banking organizations. For example, extending market value accounting to long-term holdings of investment securities (but not to loans) may reduce the amount of securities banking organizations are willing to hold and, thus, may adversely affect bank liquidity."

The report also recommended:

* the elimination of risk-based capital requirements except for internationally active banks;

* the elimination of the requirement that national banks and thrifts keep loan application registers more comprehensive than required by the Home Mortgage Disclosure Act;

* more specific guidance from regulators for assessing the reliability of loan loss allowances;

* accounting requirements for other real estate owned that are consistent with generally accepted accounting principles;

* reduced risk weighting for residential construction loans on pre-sold single-family and multifamily mortgages;

* revisions to the Office of Thrift Supervision accounting rules for contracts to sell and repurchase mortgage-backed securities of the same issuer that are not the identical original security to be more consistent with GAAP;

* a risk weight lowered to 50% on home equity loans if the combined loan-to-value ratio of the first and second mortgages is below 80%;

* a lower risk weight be lowered for all manufactured housing and mobile home communities, even if the applicable state law does not specifically define such a loan as a real estate loan;

* a lower risk weight for warehouse lines of credit secured by residential family loans be lowered to 50% (from 100%) for conventional loans and to 20% for government guaranteed loans;

* a zero percent risk weight be applied to Federal Home Loan Bank stock;

* a zero percent risk weight be set for Federal Housing Administration-insured loans and government guarantee for Department of Veterans Affairs-insured loans;

* use of internal indices on adjustable rate mortgages made permissible;

* improved disclosure requirements for ARMS to ease the burden on the reporting institutions.

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