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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** Market News International Washington Bureau 202-371-2121 **

By RODERICK M. HILLS, HARVEY L. PITT AND DAVID S. RUDER

Independent accounting standards have helped make American capital markets the best in the world. In making financial decisions, investors rely heavily upon the integrity of corporate financial reports prepared in accordance with accounting standards established by the independent Financial Accounting Standards Board (FASB). That board is supervised by the Securities and Exchange Commission (SEC).

Now, the Obama administration is on the verge of transferring accounting standards responsibility from the SEC to a systemic risk regulator. Such a radical move would have extremely negative consequences for our capital markets.

Although there may be good reasons for establishing different regulatory capital standards for financial services firms, those reasons cannot justify dispensing with the FASB's accounting standards. Acting in accord with powers given to it by the Sarbanes-Oxley Act, the SEC has formally recognized the FASB as the definitive standard-setting body, capable of "improving the accuracy and effectiveness of financial reporting and the protection of investors."

The SEC treats accounting standards adopted by the board as authoritative. If the SEC has concerns about, or disagrees with, accounting standards promulgated by the FASB, it can refuse to give them deference.

Today, the American Bankers Association, on behalf of many commercial banks, is seeking to prevent disclosure of the fair value of the financial instruments they own. It is attempting to persuade Congress that the safety and soundness of the banking system will be protected if a systemic risk regulator can prescribe accounting disclosures for financial companies.

The government shouldn't follow their advice. This change might well interfere with efforts by financial firms to raise capital. Investors will assume that the accounting standards they employ are designed to mask risks.

As former chairmen of the Securities and Exchange Commission, we are well aware of the long-held desire of commercial interests to avoid fully disclosing their finances. In the 1990s, business interests opposed publicly disclosing their post-employment pension and health obligations. Similarly, in 2000, efforts were made to prevent the FASB from eliminating distortions that inflated the balance sheet values of newly merged companies, because its elimination might make balance sheets look less favorable to potential investors.

In 1994, the FASB considered requiring companies to reflect the current value of their outstanding stock options. After intense lobbying from certain business interests and pressure from Congress, the FASB decided not to require use of the fair value method. In 2004, when the FASB finally mandated it for valuing stock options, certain U.S. business opponents continued to lobby Congress to overturn that decision.

During times of financial distress, there is always pressure to change accounting standards in order to inflate the value of assets. Under certain circumstances, there may be a legitimate need to recognize that stresses on large financial institutions may threaten the stability of the U.S. financial system. Banking regulators can ease such stresses by reducing regulatory capital requirements. But it would be a mistake to adopt legislation that would allow financial-services firms to hide their true financial positions from investors.

If changes in accounting standards are used to bury significant risks for one purpose, it will not be long before other purposes are asserted to permit further deviations. This is a dangerous path that will only hurt investors and our capital markets.

Messrs. Hills, Pitt and Ruder are former chairmen of the Securities and Exchange Commission.

    And now there are five - five Wall Street behemoths, bigger than they were before the Great Meltdown, paying fatter salaries and bonuses to retain their so-called"talent," and raking in huge profits. The biggest difference between now and last October is these biggies didn't know then that they were too big to fail and the government would bail them out if they got into trouble. Now they do. And like a giant, gawking adolescent who's just discovered he can crash the Lexus convertible his rich dad gave him and the next morning have a new one waiting in his driveway courtesy of a dad who can't say no, the biggies will drive even faster now, taking even bigger risks.

    What to do? Two ideas are floating around Washington, but only one is supported by the Treasury and the White House. Unfortunately, it's the wrong one.

    The right idea is to break up the giant banks. I don't often agree with Alan Greenspan but he was right when he said last week that "[i]f they're too big to fail, they're too big." Greenspan noted that the government broke up Standard Oil in 1911, and what happened? "The individual parts became more valuable than the whole. Maybe that's what we need to do." (Historic footnote: Had Greenspan not supported in 1999 Congress's repeal of the Glass Stagall Act, which separated investment from commercial banking, we wouldn't be in the soup we're in to begin with.)

    Former Fed Chair Paul Volcker, whose only problem is he's much too tall, last week told the New York Times he'd like to see the restoration of the Glass-Steagall Act provisions that would separate the financial giants' deposit-taking activities from their investment and trading businesses. If this separation went into effect, JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. And Goldman Sachs could no longer be a bank holding company.

    But the Obama Administration doesn't agree with either Greenspan or Volcker. While it says it doesn't want another bank bailout, its solution to the "too big to fail" problem doesn't go nearly far enough. In fact, it doesn't really go anywhere. The Administration would wait until a giant bank was in danger of failing and then put it into a process akin to bankruptcy. The bank's assets would be sold off to pay its creditors, and its shareholders would likely walk off with nothing. The Treasury would determine when such a "resolution" process was needed, and appoint a receiver, such as the FDIC, to wind down the bank's operations.

    There should be an orderly process for putting big failing banks out of business. But this isn't nearly enough. By the time a truly big bank gets into trouble - one that poses a "systemic risk" to the entire economy - it's too late. Other banks, competing like mad for the same talent and profits, will already have adopted many of the excessively-risky banks techniques. And the pending failure will already have rocked the entire financial sector.

    Worse yet, the Administration's plan gives the big failing bank an escape hatch: The receiver might decide that the bank doesn't need to go out of business after all - that all it needs is some government money to tide it over until the crisis passes. So the Treasury would also have the authority to provide the bank with financial assistance in the form of loans or guarantees. In other words, back to bailout. (Historical footnote: Summers and Geithner, along with Bob Rubin, while at Treasury in 1999, joined Greenspan in urging Congress to repeal Glass-Steagall. The four of them - Greenspan, Summers, Rubin and Geithner also refused to regulate derivatives, and pushed Congress to stop the Commodity Futures Trading Corporation from doing so.)

    Congress is cooking up a variation on the "resolution" idea that would give the Federal Deposit Insurance Corporation authority to trigger and handle the winding-down of big banks in trouble, without Treasury involvement, and without an escape hatch.

    Needless to say, Wall Street favors the Administration's approach - which is why the Administration chose it to begin with. If I were less charitable I'd say Geithner and Summers continue to bend over bankwards to make Wall Street happy, and in doing so continue to risk the credibility of the President, as well as the long-term financial stability of the system.

    Wall Street could live with the slightly less delectable variation that Congress is coming up with. But Congress won't go as far as to unleash the antitrust laws on the big banks or resurrect the Glass-Steagall Act. After all, the Street is a major benefactor of Congress and the Street's lobbyists and lackeys are all over Capitol Hill.

    The Street obviously detests the notion that its behemoths should be broken up. That's why the idea isn't even on the table. But it should be. No important public interest is served by allowing giant banks to grow too big to fail. Winding them down after they get into trouble is no answer. By then the damage will already have been done.

    Whether it's using the antitrust laws or enacting a new Glass-Steagall Act, the Wall Street giants should be split up - and soon.