US to study impact of new off-balance-sheet rules

WASHINGTON, Aug 19 (Reuters) - U.S. regulators plan to gauge how severe of a hit banks will take from an accounting change that will force them to bring more than $1 trillion of assets back on their books.

Next week regulators expect to propose a rule that seeks input on whether banks need more time to build capital cushions against the assets that were once held by off-balance-sheet trusts.

Banks will still have to move the assets back on to their books on Jan. 1, 2010, but regulators want feedback on the impact of the accounting change and whether it might be prudent to phase in the risk-weighted capital that must be held against the assets.

The Federal Deposit Insurance Corp posted an agenda on its website on Wednesday indicating that regulators will propose on Aug. 26 the rule that seeks input.

Sheila Bair, chairman of the FDIC, acknowledged earlier this month that the change would be a tough hit for some banks and could derail the recovery of the securitization market, which helps lenders extend credit.

“We support the general direction of bringing all this back on balance sheet. But the timing ... still gives me some heartburn,” Bair told the Senate Banking Committee.

Banks have traditionally used off-balance-sheet vehicles to avoid reporting requirements or to reduce the amount of capital they needed to hold to satisfy regulatory requirements. As the financial storm gathered, uncertainty about some of those vehicles helped undermine confidence in banks and accelerated the financial crisis.

The Financial Accounting Standards Board finalized rules earlier this year to force banks to move these obligations onto their books, and provide more disclosure than the footnotes that currently provide scant information to investors.

The impact of the change could be huge.

The Federal Reserve, during a recent “stress test” of the largest 19 U.S. banks, said the change could mean about $900 billion of assets being brought onto the books of those institutions.

Citigroup C.N said in a recent regulatory filing the rule could force it to bring $159.3 billion of assets back on its books, including $85.5 billion of credit card-related assets and $14.2 billion of student loans.

JPMorgan Chase JPM.N said it would likely have to add $130 billion of assets to its balance sheet, and said the change would decrease its Tier 1 capital ratio.

During the stress-test process, the Federal Reserve ensured that these largest institutions had large enough capital cushions to weather the change, but it could still affect their leverage ratios, and slightly smaller banks’ capital levels could more dramatically change.


“From an economic standpoint, we’re very concerned, especially for credit card companies,” said Mike Gullette, vice president of accounting for the American Bankers Association. “We are very anxious to see also just what kind of capital requirements that the regulators are going to settle on.”

The FASB rule has the potential to immediately yank away some companies’ well-capitalized status if regulators do not take a measured approach regarding what capital banks must hold against these assets, Gullette said.

Regulators hinted at the Senate Banking Committee hearing last week that they have some flexibility in how to bolster capital reserves against these assets.

Comptroller of the Currency John Dugan said regulators are working on an interagency rule that could tweak how regulatory capital rules respond to the assets.

“The bottom line is this stuff is going back on the balance sheet,” Dugan told lawmakers. “Banks are going to have to hold capital against it. It’s really a matter of timing and how it gets phased in.”

Dean DeBuck, a spokesman for the Office of the Comptroller of the Currency, said the guidance would deal with capital treatment but declined to elaborate. The FDIC and the Federal Reserve declined to comment.

Gullette said a risk-weighted approach to capital reserves would be appropriate because a bank should not be forced to hold a full cushion against an asset in which it’s already sold off a 95 percent stake.

“The risk in holding that security is not in the hands of the bank, it’s in the hands of the ultimate investor,” he said.

Bair said the accounting change could punish lenders for retaining a bigger portion of the risk -- a key component of the financial reform effort under way in Congress.

“I think it also could be very damaging to try and get the securitization market back because ... even if you just retain some portion of interest, the whole securitization might have to come back on-balance sheet,” Bair said. “And that also goes at cross purposes with our efforts to try to keep people having some skin in the game.” (Additional reporting by Mark Felsenthal; Editing by Steve Orlofsky)