FASB Rules Will Impact Bank Off Balance Sheet Assets

A minuet playing out now is showing that the answer is yes — but not in the way the banks want us to believe.

The issue is a couple of new accounting rules that are forcing banks to put back on their balance sheets some strange creations that bad accounting rules had allowed them to shunt aside in the past.

The banks have accepted the inevitability of that change. But they are asking the bank regulators to make the rules easier to live with by phasing them in. Otherwise, the banks say, they would need to raise more capital or cut back lending.

The logic of the off-balance sheet treatment of such things as structured investment vehicles, or SIVs, which banks created in order to get assets off their books, was that the bank did not control them, and so did not have to show the SIV assets, and liabilities, on its own books.

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That fiction evaporated early in the financial crisis. Some SIVs were among the first structures to fail, when they could not roll over loans to finance assets that had lost value. The banks chose to, or had to, rescue the SIVs. Maybe they did so to guard their reputations, or maybe they feared they would have been vulnerable to fraud allegations from those who lent to the leaking SIVs. In either case, it turned out there was a black hole that the regulatory rules had ignored in assessing how much capital the banks needed to hold.

Rest of Article at www.nytimes.com