It’s a good thing that at least some banks have practice putting securitized investment vehicles on their balance sheets. They may have to do even more balance-sheet work in the future. The Financial Accounting Standards Board will rethink rules related to how banks account for off-balance sheet vehicles.
FASB staffers are pulling together data and assessing whether risk was masked under current accounting protocols used by banks for SIVs, collateralized-debt obligations, and other formerly highly-rated instruments now languishing in an illiquid market. Forcing financial institutions to load up their balance sheets with these currently untradeable holdings could make an already dismal year even unhappier for some banks. Citigroup is sitting on around $1.1 trillion in off-balance sheet assets, analysts say. And it’s not the only bank with a significant exposure.
Despite the potential instability such an accounting change might bring, new rules may be on the way. There is considerable political pressure for greater market transparency and accountability.
Sen. Jack Reed, the Rhode Island Democrat, has asked FASB chairman Robert Herz for detailed information regarding off-balance sheet items. In a February 12 letter, he told Herz “it would be helpful if the FASB provided the Senate Subcommittee on Securities, Insurance and Investment with a written description of steps the FASB is taking to adopt improved standards” that might lead to “structured transactions using SPEs or SIVs to report in a transparent fashion that will provide investors with necessary information regarding the related assets, liabilities and cash flows of the SIV or SPE.”
The letter concludes with some fightin’ words: “After the decline in investor confidence brought on by first Enron and then other corporate scandals, and now the subprime-related issues, further disruption of the markets caused by a lack of transparency and failure to address some of these issues is unacceptable.”
That’s the tone of a legislator dreaming up a bill. Bankers, get your balance sheets ready.
