As the Financial Accounting Standards Board prepares today to give banks wider latitude in valuing assets, industry experts are divided on whether the move undercuts the government's plan to create a market for weak assets.
Daniel G. Byrne, the chief financial officer at Sterling Financial Corp. in Spokane, said the FASB's changes may make banks think twice about shedding loans through the Treasury's fledgling Public-Private Investment Program.
"There may be a desire with this accounting change to retain those loans," he said. "It may change the timing in how loans are resolved by giving banks more time to work out problems by not having to dispose of loans prematurely."
Dennis Beresford, a former FASB chairman who is now an accounting professor at the University of Georgia, agreed.
"Banks won't be forced to get rid of something because there is a big accounting writeoff," he said. "They may believe it better to hold on to the loan and let it work out over several years."
But not all bankers are convinced.
"I don't see it being meaningful on the downside, and it certainly doesn't impede the PPIP in any major way," said Stephen Steinour, the chief executive at Huntington Bancshares Inc.
A bigger question for the public-private program, he said, is whether the market will be large and liquid enough to move assets. "The fundamental issue is where will the pricing be, and none of us know that."
Indeed, even Byrne of the $12.8 billion-asset Sterling said easing accounting rules could boost the PPIP by providing buyers and sellers with a larger "middle ground" in establishing prices for assets.
"It will allow everyone to look at the underlying cash flows and perhaps come closer together, while encouraging investors to not discount the distressed assets," he said.
Christopher Marshall, a private-equity adviser who was a chief financial officer at Fifth Third Bancorp, agreed that the FASB's proposed changes could have the "unintended consequence" of keeping bad assets on banks' books, but he said the move raises broader questions.
"The proposal as it is written probably provides too much flexibility to the banks, which is never good for the investor," Marshall said.
On March 16 the FASB issued two proposals. Under one, if a company planned to hold assets until prices recovered or the holdings matured, a charge would be recognized only in the event of an expected credit loss. The other proposal would clarify that accountants do not have to look simply at the price at which an asset last traded to determine value, but may also consider cash-flow models that give a sense of how much an asset might earn.
The change already has some investors complaining about the hit to the transparency of bank portfolios. If private-equity investors remain skittish about the quality and price of toxic assets, that could diminish their interest in participating in the PPIP.
John A. Kanas, a former chairman and CEO at North Fork Bancorp and now a senior adviser for W.L. Ross & Co., noted that bankers had no complaints with the accounting rules when they worked to the industry's betterment. "I would hate to see us trade away mark to market … because it does give transparency to shareholders and analysts."
Regulators may press banks to dispose of loans and securities through the PPIP, said Ralph MacDonald 3rd, a securities lawyer with Jones Day.
For example, the Federal Deposit Insurance Corp. could try to structure its auction process for banks' toxic assets to allow the relaxed accounting rules to work in concert with the public-private initiative. He said the FDIC could encourage participation in the program by letting bankers "explore the potential interest" in a loan tranche before requiring them to move the assets to available-for-sale status. "That way, the banks don't record a loss unless they are set to complete the sale," MacDonald said.
