Basel Committee continues to soften stance with latest liquidity proposal; will FASB soften on fair value for bank loans?
The past few months for banks have been a case of God closing a door but opening a window. That’s because while they get hammered by politicians and regulators in one area, elsewhere they’ve been getting relief. That theme continues this week.
On Tuesday, the Basel Committee announced new proposals on liquidity coverage ratios (LCR), but also announced it would phase in the introduction of the new global standard requiring banks to hold enough highly liquid assets, mainly government bonds, to cover 30 days of net cash outflows. The phase-in period will start in 2011 but only become an official global standard in January 2015. Once again, banks are breathing easy and once again, for treasurers, this likely means no change in lending behavior by banks.
This somewhat slow-motion action is similar to the phase-in approach the committee took in September when the committee proposed rules to increase the minimum common equity requirement as well the requirement that banks hold a “capital conservation buffer.” The phase-in for those rules will be eight years. (See related item here.)
The committee said the reason for this latest phase-in was to study elements of the ratios, “because these requirements are brand new.”
Fair Value Fold Next?
Meanwhile the Financial Accounting Standards Board (FASB), having allegedly shown the door to former head Robert Herz, has filled his board seat with less of a fair value champion (Russell Golden) as well as added two more seats to the board (and filling them with former Big 4 accountants who may lean away from fair value). Some speculate that this could be the end of fair value accounting, as the organization continues on the path to convergence. No-meddling fair value rules might make GAAP convergence with IFRS that much easier. That is, adopting the IFRS approach – amortized cost accounting for loans and debt – instead of the fair value, marked-to-market approach.
Once again, banks – and by extension treasurers – will like this, as it was fair value of bank loans that had been controversial. At the spring meeting of The NeuGroup’s Bank Treasurers’ Peer Group, members grumbled about the continued march toward fair value and the inconsistencies created by the half-steps being taken by standard-setters. Not having to go through the valuation process likely won’t crimp lending.
FASB will be getting further pressure in the weeks and months ahead, especially when there are surveys like the one Keefe Bruyette & Woods/Greenwich Associates put out recently that found that two-thirds of those US institutional investors polled strongly oppose FASB’s fair value for bank loans proposal. KBW said Institutions’ main objections to fair value accounting were two-fold. “First, they believe mark-to-market valuations would not be helpful in making investment decisions because fair market values for loans held on banks’ books and other infrequently traded financial instruments would not be reliable.” They added that 45 percent said expanding mark-to-market rules for bank loans “would cause them to reduce their level of investment in US banks.” Second, “they fear that variations in reported fair market values will magnify cyclicality in bank earnings and the economy as a whole.” As an alternative to fair value, KBW said institutions would prefer changes “that would increase transparency and provide enhanced disclosure of information on specific bank portfolio holdings.”
Perhaps with the easing of the economic crisis, regulators are feeling in a charitable mood (or under pressure: FASB has received more than 1500 comment letters, most in opposition to fair value) Certainly, the political winds favor pushing back on the somewhat caustic and punitive regulatory environment of the past two years. So it will be interesting to see how all the regulation plays out over the course of the next few years, particularly as new regimes take over around the world.