Accounting standards-setters on Thursday left bankers with no clearer an idea of whether they will someday be forced to value nearly all the financial instruments on their books on a mark-to-market basis.
But they did indicate a new front in the battle over the issue: deposits.
It will be several months before the Financial Accounting Standards Board issues a formal proposal to expand the use of mark-to-market accounting, and any rule changes would not be adopted until 2011 at the earliest, Chairman Robert Herz announced at the start of a closely watched meeting.
In the meantime, Herz said, the board will try to answer a variety of questions, including how fair value should be measured, where it ought to be presented within a company's financial statements and whether the benefits of any changes would be worth their cost.
Key amongst those issues is whether a rule that would have companies mark financial instruments to market on the asset side of the balance sheet should require the same treatment for liabilities, which for banks would include core deposits.
The FASB staff already has initiated outreach efforts to determine how banks value their deposit bases, and how information about the fair value of deposits might be used by examiners of banks' financial statements. It plans to report back later this month or in early September with different options for the board to consider, Melissa Maroney, project manager at the FASB, said at Thursday's meeting.
The American Bankers Association's position on the deposit issue is still under development, indicating the philosophical thicket surrounding the matter. On the one hand, one of the ABA's arguments against expanding mark-to-market to assets such as loans that are held to maturity has been the lack of a corresponding treatment of liabilities. On the other hand, marking liabilities to market raises its own set of headaches, without necessarily promising to improve the quality or usefulness of the data that investors and analysts would receive.
"Theoretically we agree that if you're going to mark a significant amount of assets to market, then theoretically you should mark the core deposits to market," said Donna Fisher, the ABA's senior vice president of tax, accounting and financial management. "What I don't know is how much work it is."
Beyond tallying account balances and interest payment obligations, banks trying to mark deposits to market also might want to include the intangible value of deposit relationships, which is what banks sometimes pay a premium for when acquiring a branch or deposit pool. But to Christopher Whalen, managing director of Institutional Risk Analytics, the whole exercise would be a waste.
"The mark-to-market of a deposit is par, and to say otherwise is absurd. Deposits don't trade, there is no observable market, and they're mostly a function of how aggressive a bank's management wants to be in terms of growing or maintaining liabilities in that particular class instead of the alternatives" such as bonds or short-term funding, Whalen said. "The FASB has to hold back from this idiocy and just admit there are certain things we can't know."
The FASB has attempted before to address core deposit values. In deliberating FAS-115 in the early 1990s, it decided the notion of fair-valuing those and other liabilities was unworkable, and left them out of the rule addressing accounting and reporting requirements for investments.
One area where some banks already mark their liabilities to market is their own debt, which they have the option of recording at fair value. As a result, a poorly performing bank that sees a decline in its bond prices can actually make itself look better by lowering the liability associated with the bonds — because presumably it would cost less to redeem them in the market. But those kinds of accounting feats raise questions about earnings quality, and analysts would not necessarily take a kinder view toward mark-to-market values for deposits, said Ethan Heisler, a managing director with Hexagon Securities LLC in New York.
"It's such a complicated process," he said. "Even a small bank offers so many different kinds of deposit products with different kinds of assumptions and different kinds of incentives. It's hard for me to see how boiling this down to one line item on a fair-value basis means much."