Preparing for the Changes in Bank Regulation

Yesterday, Federal Reserve Governor Elizabeth Duke gave a speech at the AICPA on banks. She started with the standard reflection of what’s happened, but the crux of her speech was focused on bank accounting and more importantly the new upcoming rules and regulatory changes.

She also spent a considerable amount of time on the collaboration between Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), and alluded to the impact of credit stemming from the upcoming implementation of FASB 166 and 167.

One thing I did find particularly interesting was her comments regarding reclassification.

It’s my understanding that the new FASB/IASB rules will no longer allow banks to reclassify paper. Essentially, they’ll include provisions prohibiting re-categorization of assets from level one, two, and three after they’ve been assigned to such. I believe the words used in the August 13 FASB board meeting discussions were something along the lines of “when they’re put there…they stay there.”

Her comments below allude to the same…
 

“To this end, safeguards should be implemented to eliminate a firm's ability to overstate gains or understate losses by switching back and forth between business models or by reclassifying assets from one business segment to another.”

Her thoughts regarding the impact and capital restraint facing banks relating to G20, FASB/IASB combo, and FASB 166 and 167:
 

“The recent G20 agreement calls for a retention of risk, or "skin-in-the-game" approach for asset securitizations. It also calls for higher capital standards and a leverage ratio for all banks. If the risk retention requirements, combined with accounting standards governing the treatment of off-balance-sheet entities, make it impossible for firms to reduce the balance sheet through securitization and if, at the same time, leverage ratios limit balance sheet growth, we could be faced with substantially less credit availability. I'm not arguing with the accounting standards or the regulatory direction. I am just saying they must be coordinated to avoid potentially limiting the free flow of credit.”

Less available credit... hmmm sounds kind of familiar.