New FASB standards won't hit banks as hard as thought: analyst
Monday, 16 November 2009

By Matthew Quinn

Financial accounting standards that will force the assets of some special purpose entities onto the books of big banks won't have as big an impact as previously believed, according to new research.

Barclays analyst Jason M. Goldberg said in a note to investors on Monday that he expects the adoption of FAS 166 and 167 to increase assets at the four largest U.S. banks -- Bank of America, J.P. Morgan Chase, Citigroup and Wells Fargo -- by $443 billion, down from his previous estimate of almost $550 billion.

Goldberg revised his estimate due to recent changes to interpretations and clarification from the Financial Accounting Standards Board on managed funds.

Both FAS 166 and 167 will be effective at the start of a company's first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis.

FAS 166 will require more information about transfers of financial assets, including securitization transactions, and where companies have ongoing exposure to the risks related to transferred financial assets. It eliminates the concept of a "qualifying special-purpose entity". FAS 167 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting or similar rights should be consolidated.

Citigroup is expected to have the most assets coming back on balance sheet with $154 billion. Bank of America could see its assets increase by $121 billion, while J.P. Morgan could add $100 billion and Wells Fargo $48 billion.

In recent financial reports, Citigroup was the only major bank to provide its expected retained earnings hit, Goldberg said. The bank expects retained earnings to be reduced by $7.8 billion. Barclays used disclosures on expected capital impact to estimate that B of A will take a $6.7 billion hit and J.P. Morgan $3.5 billion. The impact on Wells' retained earnings is estimated at under $1 billion.

With respect to tier 1 capital ratios, Citi's could take a 132 basis point hit with the adoption of the new standards. Bank of America's tier 1 capital ratio could fall 63 bps, compared to 22 bps for Wells Fargo and 40 bps for J.P. Morgan.

Also, the new standards could result in the loss of GAAP sales treatment in certain securitization transactions, which could be meaningful under the Federal Deposit Insurance Corp.'s securitization rule, Goldberg wrote.

"Under the FDIC's securitization rule, so long as a securitization is accounted for as a sale for GAAP purposes, the FDIC, when taking over a failed bank, will treat the transferred assets as sold and thus surrender its rights to reclaim the assets," the note said.

However, under FAS 166 and 167, Goldberg noted that GAAP sales treatment will be eliminated in certain securitizations, which could put securitized assets at risk of seizure by the FDIC.

Last week, the FDIC board voted to approve an interim rule, through March 31, 2010, that continues safe-harbor treatment for transfers of financial assets through securitizations issued prior to FASB's announcement of changes to GAAP that prevents most securitizations from being treated as off-balance sheet for accounting purposes.

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