WASHINGTON — At a time when banks are strapped for capital and acquirers capable of taking over troubled banks seem in short supply, regulators are proposing to let buyers count some goodwill toward Tier 1 capital.
Under current rules, buyers must deduct goodwill tied to a deal from capital. But under a plan issued by the four banking and thrift agencies this week, acquirers could count whatever goodwill is used to defer taxes toward meeting regulatory capital requirements.
The Federal Deposit Insurance Corp. issued the proposal Tuesday without any discussion, and the Office of Thrift Supervision and Office of the Comptroller of the Currency followed suit. The Federal Reserve Board signed off on it Monday. The agencies put the proposal out for just 30 days of comment, largely because the industry favors the move and the regulators agree it is necessary.
Though bankers would prefer that all goodwill in a sale be kept as capital, sources said the proposal was a significant step toward reviving a sluggish M&A market.
Carol Larson, a senior client partner at Deloitte & Touche, said the rule, if finalized, may spur dealmaking and could help current acquirers, such as Bank of America, which announced a $50 billion deal over the weekend to buy Merrill Lynch.
The rule "lowers the barrier," he said. "Right now, institutions are looking for capital wherever they can find it. … For the moment, that's very helpful. Bank of America would probably be pleased about this if" it is implemented in time for the Merrill deal.
Under fair-value accounting rules implemented by the Financial Accounting Standards Board, acquirers in bank deals have to take writedowns when the value of the seller's assets falls below the purchase price. Industry representatives are bracing for more severe writedowns with FASB planning to expand fair-value rules at the end of this year.
The industry voiced its concerns as early as 2001 over the omission of goodwill in Tier 1 capital, and has continued to press for an exception as fair-value accounting rules have evolved.
"We are writing … to request that the agencies focus — as soon as possible — on the treatment of goodwill for regulatory capital purposes," Edward L. Yingling, then deputy executive vice president at the American Bankers Association, wrote in a 2001 letter to regulators. (He now heads the trade group.)
In February, Wayne Abernathy, an executive vice president at the ABA, insisted that the agencies address the issue "as banking institutions are considering active ways to increase capital in this uncertain economic environment."
Robert Storch, the FDIC's chief accountant, said the agencies' efforts to allow a piece of goodwill to remain part of Tier 1 capital were justified. "We have allowed that kind of treatment for certain other intangible assets, but we had not done so for goodwill," Mr. Storch said. "By extending this treatment to goodwill, this is an exercise in fairness."
Walter G. Moeling 4th, a partner at Powell Goldstein LLP, said it has become difficult in this environment for acquirers to project how much goodwill a sale will generate. "So much of the bank is volatile, you don't know on the front end how much goodwill" a sale will produce, Mr. Moeling said. "You're taking a big bet on where it will come out."
The proposed rule "will clearly facilitate the acquisition, particularly of banks that are in somewhat volatile situations," he said. "That's where you're going to have the hardest time measuring [goodwill] in advance."
Ralph F. MacDonald 3rd, a partner at Jones Day, said the proposal would help the M&A market "around the margin." But he said the FASB needs to adopt broader changes. Namely, he called on FASB to reverse a rule set to take effect this year that would dramatically increase goodwill in certain sales, and to halt fair-value accounting altogether.
Tuesday's proposal is "going to help the M&A market because it reduces the effects of goodwill on capital," he said. "The problem is you still have to mark the assets and liabilities to market."
But revising mark-to-market accounting would "have a bigger effect on accounting for the M&A market."