Banks are losing the war against market-value accounting.
The Financial Accounting Standards Board agreed Wednesday on a tentative plan that would make it difficult for a bank to report much of its securities holdings at anything but market value.
ABA Aide: |A Tough Standard'
"My initial reaction is that it's a tough standard, and it will change banking," said Donna Fisher, accounting policy manager for the American Bankers Association.
Meanwhile, the Securities and Exchange Commission is continuing to extend its own effort to force banks to mark their securities portfolios to market.
This week, the SEC pressured First Florida Banks Inc. to revalue a portion of its investment portfolio before it will clear a stock offering in connection with the Tampa bank's acquisition by Barnett Banks Inc., Jacksonville, Fla.
This is the First publicized example of the SEC's wielding its power to force mark-to-market accounting in connection with a proposed merger. Previous revaluations had taken place at banks registering stock and bond offerings.
In addition, it was learned that Bank of New York Co. will disclose a reclassification of its securities holdings in its second-quarter 10-Q report to the SEC, due out next month. The change will be a response to SEC pressure, sources said.
And Norwest Corp. disclosed Wednesday that it valued a portion of its investment portfolio at market value in the second quarter, the first time it has done so. This did not come in response to SEC pressure but as an acknowledgment that market-value accounting has become a reality.
"The SEC has won the war," a bond trader said, "and now they are consolidating the victory."
Banks' securities portfolios are divided into two categories: investments and securities held for sale. Investments are valued at historic cost, while securities held for sale are valued at the lower of cost or market value.
Banks have long opposed mark-to-market accounting, arguing that it would cause greater earnings volatility. SEC Chairman Richard Breeden and other proponents say market-value accounting is needed to present an accurate picture of banks' securities portfolios.
At its meeting Wednesday, the accounting standards board agreed that, to avoid market-value accounting, banks must have "the positive intent and ability to hold [securities] to maturity." Current rules only require that securities be held on a long-term basis or for the fore-seeable future.
The seven-member FASB set up two categories of securities holdings that must be marked to market: "securities available for sale" and "securities held for trading."
Gains or losses on securities available for sale will be taken in shareholders' equity. Those on securities held for trading will be reported in quarterly income.