In the middle of a credit crisis that only seems to get worse, Wall Street is mustering its lobbying clout to delay tougher accounting rules that would force banks to add $5 trillion to their balance sheets.
For years, accounting standards allowed U.S. banks to keep certain loans, such as those linked to risky subprime mortgages, in off-balance sheet vehicles. But members of the Financial Accounting Standards Board (FASB), which sets U.S. accounting rules, have become convinced that approach hid the true risks banks faced from these vehicles, and that standards must be fundamentally altered.
Under FASB's current thinking, analysts estimate financial institutions could be forced to book $5 trillion, which would most likely include troubled loans.
That would skew capital ratios, force banks to stash away cash to offset their risks, and hit their liquidity at the worst possible time.
"These drastic measures are being rushed and could single-handedly erase the efforts of policymakers to provide stability and restore liquidity to our markets," said Brendan Reilly, senior vice president with the Commercial Mortgage Securities Association (CMSA).
"Any changes must be delayed until all options and consequences are carefully examined," he said.
However, under direction of the Securities and Exchange Commission, FASB must revamp the accounting standard, known as FAS 140, by 2009. It could release a proposal on the new rule in the next few months.
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