New Fight Due Over Marking to Market

The banking industry, which had some success this year fending off efforts to broaden market-value accounting, is bracing for another battle.

An accounting rulemaking body is considering a proposal that would require banks to carry investment securities on their books at market value. Currently, though securities in trading accounts must be recorded at market value, investment securities are booked at their cost.

Under the proposal, if investment securities decline in value, a bank would have to reflect that on its balance sheet - even though the bank aims to hold them until maturity. Banks complain this would cause unnecessary fluctuations in earnings, asset values, and, consequently, capital ratios.

ABA Is Opposed

"We strongly object to this idea," said Donna Fisher, manager of accounting policy for the American Bankers Association.

The plan is still in the preliminary stages. Bankers expect the Financial Accounting Standards Board to put a formal proposal out for comment in January. Public hearings are expected to be held in the third quarter of 1992.

The accounting group for several years has floated the idea of having banks mark all their assets - including loans - to market value. Heated opposition from the banking industry derailed the idea earlier this year.

The board instead ended up calling for banks to disclose in financial reports the up-to-date, or fair, value of all loans. But balance sheets will not change.

A Breather for Smaller Banks

The disclosure rule, considered a certainty for months, was formally approved last week. The rule is slated to take effect in 1992, although banks with less than $150 million in assets are exempted until 1995.

While happy to avoid having to change their balance sheets, bankers also opposed the disclosure rule, which they consider onerous and inconsistent with banking practice. Despite a growing secondary market for bank loans, most banks hold loans until maturity.

"The new accounting standards are not applicable to the way banks operate," said Ms. Fisher of the ABA. One example: How do banks set the fair value of a loan to a hog farmer?

According to bankers, the example is not as far fetched as it sounds. Most borrowers are more similar to the hog farmer than to a traded security, which is easily priced.

A Signal of Intent

Nevertheless, the adoption of the disclosure rule signals the direction that the FASB is moving.

For one thing, bankers a few months ago said the rulemakers were working on a proposal that could lead to increased loan-loss reserves. The board has already reached some tentative conclusions about how to value a loan. The current value will include both principal and interest, discounted to present value. Banks will compare that new value to the loan balance; the difference is the loan allowance.

And worst of all, said Ms. Fisher, is the idea of marking securities to market value. Investment portfolios account for about 30% of banks' collective assets.

Market Impact Questioned

The disclosure rule has bankers worried about their own stock prices as they start to regain favor among investors.

"There is the perception among bankers that if negative information about a loan portfolio is known in the marketplace, it could affect the price per share of the bank's stock," said R. Harold Schroeder Jr., a consultant with Ernst & Young in New York.

The standards board has not finished its cost-benefit analysis of the new rule on disclosing market value of loans. But as long as valuations are falling, any accounting change that reflects fair or market value probably would force banks to take the dreaded step of raising capital reserves.

But even rising valuations appear to have a drawback: added volatility in the stock market.

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