Off-balance sheet vehicles — qualified special-purpose entities, or QSPEs — were blamed by many for fuelling the financial crisis: helping banks hide their true leverage and avoiding regulatory capital requirements. Small wonder then, that the US Financial Accounting Standards Board, the FASB, were keen to address the issue. However, as was the case with the recent mark-to-market debate, the FASB are encountering a not inconsiderable amount of pressure from the financial industry.
From the Wall Street Journal:
The financial-services industry is taking steps to delay an accounting rule that would force banks and others to bring some of their off-balance-sheet vehicles back onto their books next year, which could force some to raise additional capital.
A group that includes the Chamber of Commerce, the Mortgage Bankers Association, and the American Council of Life Insurers and others sent a letter on June 1 to Treasury Secretary Timothy Geithner, regarding the off-balance-sheet accounting-rule change, saying it should be adopted “cautiously and seek to minimize any chilling effect on our frozen credit markets.”
The letter was signed by 16 industry associations, many of which were part of a group known as the “Fair Value Coalition,” which was formed earlier this year with the goal of changing mark-to-market accounting rules. Mark-to-market accounting rules set guidelines for banks on when they are required to reflect market prices in the values they assign to hard-to-value securities and other assets. . . .
Now, this is likely the same kind of lobbying that took place before the FASB took steps to ease mark-t0-market rules back in April. As such, the results of the forthcoming QSPE review will probably be a good litmus test for the independence of the FASB as a whole.
The proposed amendments to FASB Statement 140 will basically get rid of the idea of QSPEs altogether.
The rule change would bring $900bn in assets back onto balance sheets, according to recent estimates by regulators. Individual banks like JP Morgan have said the FASB change would require it to consolidate $145bn in off-balance sheet assets, and Citigroup said it foresees circa $166bn coming back onto its balance sheet.
The rule change, if it happens as planned, will be effective for banks reporting from Nov. 15, 2009 — so basically in 2010. It’s important to note that the amendment has already been postponed once — at the request of banks like Citigroup and trade organisations like those mentioned above. However, the FASB chairman has since gone on the record to say that the Board will finalise the new guidelines by June.
Definitely one to watch.
Proposed amendments to statement 140 – FASB
The management of banks’ off-balance sheet exposure – BIS paper, 1986
Marketing mark-to-market changes to the FASB – FT Alphaville