Monday, August 24, 2009

Bank Accounting, MAI

"If banks' earnings look better, you can partly thank accounting rule makers. The Financial Accounting Standards Board's relaxation of controversial mark-to-market accounting rules in April gave banks new flexibility regarding impairment charges. Wells Fargo and State Street were two whose second-quarter earnings benefited. ... FASB eased the mark-to-market rules under pressure from banks and some in Congress. The changes help banks avoid reductions to earnings when taking 'other-than-temporary' impairment charges for losses on toxic investments. ... Jack Ciesielski of the Analyst's Accounting Observer has calculated that, without the changes, 45 banks he studied would have reported earnings a median 42% lower. ... Moving impairment charges to other comprehensive income instead of earnings helps the banks in another way. They avoid reductions in their regulatory capital. Thus, some key capital ratios like Tier 1 capital get at least small boosts", Michael Rapoport at the WSJ, 29 July 2009, link:

"Accounting rule-making bodies should resist the kind of meddling by politicians and interest groups that recently prompted them to ease rules for valuing troubled bank assets, an industry panel recommended in a report. The report, issued Tuesday by the Financial Crisis Advisory Group, also said that existing accounting standards in the US and abroad probably have allowed financial institutions to overstate the value of assets, not the opposite, as some contend", Tom McGinty at the WSJ, 29 July 2009, link:

The banks are not in as good financial shape as they want the public to believe. With the aid of Congress, bank accounting, which was bad, got worse.

What Congress should do is go all the way and exempt banks and their CPAs from the federal securities law. Why bother with some "trimming around the edges"?


Anonymous said...

The "assets"...

Why do regulators allow such opacity to exist for securities pricing? That alone is a primary cause of systemic instability.

I guess it shouldn't really surprise me...that opacity favors the banks in so many ways. Why would they allow it to be changed?

diwali sweets said...

The banks are not in as good financial shape as they want the public to believe. i think its too bad.