Here's why fair-value accounting is not good for community banks.

The vast majority of community banks are well managed. Community bankers have minimized credit, liquidity, and interest rate risk; produced a stable, consistent return for shareholders; promoted community welfare; and consumed the least amount of regulatory time and attention.Investors in community banks are looking for low risk, stability, and quality returns over the long term. The motivation for registering community bank capital notes and stock to be traded publicly is to attain liquidity for investors.

But the increase in cost of compliance, the lower rates of return, and the added complexity of fair-value accounting principles will be a burden on community banks. The cost of data collection and use of fair-value calculation models is significant. The added cost of auditing the fair-value calculations is significant. The staff education requirements are significant.

All these costs raise the question: For what benefit? Will fair-value reporting produce lower risk or increase returns on investments in community bank securities? Not unless the community bankers have been poor managers in the past. And, in fact, the costs of compliance with the new fair-value rules will decrease returns.

Will fair-value reporting enhance the bank regulatory aim of assuring safety and soundness? The current proposal of reporting fair value for securities and loans with related offsets to income and expense will create reported (but unreal) volatility of earnings and capital. Asset-value fluctuations due to interest rate movements and economy driven credit-quality issues have created "strange" income and losses in larger financial institutions in the recent past. Until now community banks have been spared from such volatile reporting.

And what is the logic of restating asset values while ignoring the stability of the funding sources in community banks? Core deposits make up most of the funding of community bank loans. Community bankers have learned how to match the terms of loans with the terms of their unique deposit base so as to manage liquidity needs and interest rate fluctuations.

All of this added cost and complexity, and what is the return? Nothing.

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