WASHINGTON - Federal regulators this week will propose changing capital and reporting requirements to bring industry rules in line with new market value accounting standards.

The banking and thrift agencies are expected to recommend that institutions add or subtract from tier one capital any unrealized gains or losses in the portion of their securities portfolio that are classified as "available for sale."

Tier I is one-half of risk-based capital, the tool regulators use to measure a bank's credit and off-balance sheet risk. Tier I is considered the tougher of the two risk-based components because it is comprised of various forms of equity capital.

Each Agency to Review Plan

The Federal Reserve Board on Wednesday is scheduled to be the first of the four federal agencies to consider the plan. The Comptroller of the Currency, the Federal Deposit Insurance Corp., and the Office of Thrift Supervision are expected to take up the issue later this month.

While no formal action yet has been taken, regulators working on the plan said the staffs at all the agencies are concurring on the changes to tier one capital. Still, the heads of the agencies may have different ideas and alter the proposal.

Once all the agencies have introduced the proposal, it will be published in the Federal Register. Comments will be accepted from interested parties for a month.

Rule Due by Yearend

The regulators must have a final rule in place by yearend because that's when the accounting rules take effect.

The Financial Accounting Standards Board set the stage for the changes when it voted in May to require banks to mark certain assets to market.

The accounting changes, called FAS 115, require banks to report at market value securities that are not in a trading account and will not be held to maturity. The changes do not affect income, but do impact capital.

Banking regulators would rather not be making these changes. They generally oppose market-to-market accounting on the grounds it injects too much volatility into bank capital calculations.

Limited Choice

But, they don't have much choice because, by law, bank capital standards must be at least as stringent as Generally Accepted Accounting Principles, which are dictated by the accounting standards board.

Larger banks may be affected the most because smaller banks hold more of their securities to maturity.

"Banks will likely shorten the maturities of their securities portfolio," one official writing the new regulations said.

The upside: banks will be more liquid and less susceptible to fluctuations in interest rates, one official writing the new regulations said. The downside: shorter-term securities produce less earnings.

Taking the Gain

Another regulator said that if a bank has sizeable unrealized gains, it may cash out and take the gain to avoid the risk of a market turnaround that could force a hit to capital.

Swings in capital are more important to bankers than ever because regulations adopted last year require regulators to come down hard on banks when their tier one risk-based capital falls below 4%.

These Prompt Corrective Action rules allow regulators to control everything from dividend payouts to asset growth, depending on how low capital goes. When capital drops to 2%. the regulators may seize the institution.

In addition to changing capital rules, regulators are expected to change the quarterly call report so banks can disclose changes in the value of their securities available for sale.

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