The Financial Accounting Standards Board recently proposed a change to the way companies account for financial instruments to require the use of a fair-value model. The FASB's proposal has come under fire from an array of market participants because of the negative impact it would have on companies and our economy. I share these concerns.

If enacted as written, the FASB's proposal would fundamentally alter banks' business models and could negatively impact the nation's economy. The proposal would introduce fair-value accounting for nontrading, plain-vanilla debt instruments that are held for collection and most liabilities held for payment. Fair-value accounting for trading instruments makes sense. But introducing these accounting methods for traditional products held in banks' portfolios is irrational and will provide no benefit to the industry, consumers or regulators.

Perhaps my greatest concern is the FASB's complete failure to comprehend the role traditional banks play in our economy. In general, community banks rely upon relationship lending to extend credit to individuals and businesses. That is, community banks rely upon soft and hard information when performing loan underwriting, and not merely upon models or credit scores.

Further, community banks tend to keep nontrading, plain-vanilla loans on their books for the entire life of the loan. This high-touch model of relationship lending is a critical characteristic of community banking. These assets are far more valuable to the bank that originates and services its loans, rather than some arbitrary fair-value model. The FASB proposal, however, would force banks to alter their business models to accommodate these accounting standards. I fear the proposal may force banks to curtail the extension of credit to individuals and businesses, thereby stifling economic development and threatening economic stability.

Fair values are usually not relevant for certain assets, such as loans held for the long term, and are rarely, if ever, relevant for liabilities.

Where community banks have disclosed fair values as required by FAS 107, such disclosures have not provided critical information. The FASB proposal, as baffling as it may be, seems to be telling banks how they should manage their businesses, rather than reflecting how banks are managing their business.

The purpose of accounting is not to dictate business practices. Rather, it is to ensure business practices are conducted in a responsible manner. Further, fair-value amounts have generally been found to be unreliable in illiquid markets. Consequently, imposing fair-value accounting could damage the credibility of banks' financial statements.

In addition, the proposal would run counter to a stated objective of the FASB to provide more convergence between domestic and international accounting standards. Convergence should remain an important goal for the FASB to enhance clarity and transparency on an international level. Finalizing the fair-value proposal as written would greatly undermine that valuable objective.

As a regulator, I am fully supportive of transparency in the banking industry. However, the FASB's proposal would fail to meet this important objective.

Instead, it would result in needless burden and confusion for financial institutions, less-credible financial statements and even reduced credit availability for individuals and businesses.

I encourage members of the FASB board to reject this proposal.

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