WASHINGTON (MNI) - U.S. banks are asking their regulators to delay implementation of new risk-based capital guidelines linked to changes in the accounting of securitized assets and phase-in the resulting higher capital requirements over up to three years.
And once the bank regulators decide to implement new rules on regulatory capital requirements -- on the back of new requirements that banks bring significant amounts of securitized transactions on to their balance sheets -- banks are urging the agencies to phase in increased capital requirements over up to three years and incorporate substantial exemptions.
A key argument against the rule as proposed is that if the bank regulators -- the Office of the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision -- enact capital rule changes without a phase-in, banks will have to scale back their extension of credit even more.
Such arguments come at a time banks are already cutting credit lines and have been criticized for not using the relief they obtained from the government's emergency measures to distribute more credit.
Regulatory agencies proposed on September 15 to "modify their general risk-based and advanced risk-based capital adequacy frameworks to eliminate the exclusion of certain consolidated asset-backed commercial paper programs."
In issuing the proposal and submitting it for comment, the agencies said at the time they seek to "better align capital requirements with the actual risk of certain exposures."
They are also seeking to assess the impact of the new rules announced in June by the Financial Accounting Standards Board that will result in the consolidation of off-balance sheet securitized transactions starting in 2010.
Bank regulators use both leverage and risk-based measured to assess banks' regulatory capital levels and whether they are sufficient.
"The agencies use generally accepted accounting principles (GAAP), as established by FASB, as the initial basis for determining whether an exposure is treated as on- or off-balance sheet for regulatory capital purposes," they wrote, which is precisely why FASB's changes will have a direct impact on capital requirements.
In the regulators' view, there is no "compelling" basis "for modifying their regulatory capital requirements to alter the effect of the 2009 GAAP modifications on banking organizations' minimum regulatory capital requirements."
The regulators also expect the accounting changes to "result in higher regulatory capital requirements for those banking organizations that must consolidate," which is "appropriate."
In its letter reacting to the regulators' proposed changes, "BlackRock disagrees with the guidance in SFAS No. 167 that would require it and other asset managers to consolidate many of their managed funds and has been active both individually and as part of an Investment Managers' Working Group in communicating its concerns to both the Financial Accounting Standards Board ('the FASB') and the Office of the Chief Accountant of the Securities and Exchange Commission ('the SEC').
However, Blackrock should get some relief from FASB's latest move to consider delaying by a year the implementation of FAS 167 for asset managers.
No formal proposal has been issued by the FASB and some asset management industry sources are expecting one next week.
Following its Nov. 11 Board meeting, FASB said, "The effective date of Statement 167 will be deferred for certain funds until the joint IASB/FASB consolidations project is completed (late 2010). The deferral prescribes that Statement 167 will not be effective for a reporting entity's interest in an entity," as long as certain conditions are met. The statement referred to the International Accounting Standards Board.
"Examples of entities that may meet these conditions include, but are not limited to, mutual funds, hedge funds, private equity funds and venture capital funds," the FASB said. "Examples of entities that do not meet these criteria include, but are not limited to, securitization entities, asset-backed financing entities, or entities formerly classified as qualifying special purpose entities."
"Deferring the effective date of Statement 167 for those entities will allow the FASB to resolve issues about how to distinguish between a principal and agent relationship jointly and consistently with the IASB," the U.S. standard setter said.
So for non-asset managers, all hopes to cushion the impact of the accounting changes on capital requirements lie with regulators.
In their comment letters, financial institutions asked for a delay in the implementation of regulatory capital rule changes, to add exemptions and phase-in the implementation of increased capital requirements over up to three years.
This is no surprise as the proposed changes in risk-based capital would require some banking institutions to consolidate the assets, liabilities and equity of certain Variable Interest Entities onto their balance sheet for financial and regulatory reporting purposes.
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