SEC, Treasury not discussing suspending fair value rule

WASHINGTON (Reuters) - The U.S. Treasury Department and the Securities and Exchange Commission are not discussing the suspension of a controversial fair value accounting rule blamed for billions of dollars in bank losses, a source familiar with matter said on Thursday.

Speculation that the U.S. government would suspend the accounting rule surfaced earlier on Thursday, sending U.S. stocks higher. But the source said no such discussions had taken place between the Treasury Department and SEC.

Key policymakers have suggested that the rule could be amended. Sen Christopher Dodd, the Democratic chairman of the Senate Banking Committee, said it might be possible to modify fair value accounting rules for banks facing steep write-downs of troubled assets without abandoning the underlying accounting standard.

Dodd told reporters on Wednesday evening that at least one former bank regulator was discussing how to approach the difficult issue without “walking away from” fair value (also called mark-to-market) standards.

The issue of how to value distressed assets held by U.S. banks has been one of the most difficult challenges in constructing a bank rescue plan, according to industry sources and lawmakers.

The Obama administration is expected to outline next week how it plans to handle the second $350 billion of a $700 billion financial rescue fund also known as the Troubled Asset Relief Program (TARP).

If the government buys some bad assets as part of the rescue, it could force banks to drastically write down billions of similar assets. That could create further instability unless changes are made to the accounting rule which requires assets to be valued at market prices.

Earlier in the week, Democratic Rep Barney Frank, the influential chairman of the House Financial Services Committee, said the accounting rule should not be abolished but said it can make bad situations worse.

“One of the things I think we should be exploring is the extent to which you can retain mark-to-market but make the consequences discretionary with the regulators rather than automatic,” said Frank, a Democrat from Massachusetts.

Investors favor the accounting rule because they say it allows them to see what is truly on banks’ balance sheets.

Critics such as publisher Steve Forbes, banks and some lawmakers blame it for the billions of dollars in bank write-downs.

Industry groups such as the U.S. Chamber of Commerce and the Financial Services Roundtable are pushing for changes to the accounting rule.

“Temporary suspension of the (fair value) rule will allow the goals of (the second phase of TARP) to be realized,” said Scott Talbott, the Roundtable’s senior vice president of government affairs.

“If uncorrected, the current accounting rule would trigger losses across the industry. These losses would weaken balance sheets and reduce the ability of banks to lend,” he said.

The Chamber of Commerce, does not want the rule to be suspended, but said improvements were needed.

The Chamber urged the Treasury Secretary, accounting rulemakers and regulators to put a system in place to split the losses or write-downs into credit and liquidity losses.

Credit losses occur when a borrower no longer has the ability to repay a loan and requires a company to immediately recognize the loss.

Liquidity losses are potential losses and there is an expectation that a borrower will still be able to repay the loan. Those losses are not recognized until the asset is sold.

Currently write-downs in assets such as mortgage-backed securities are recorded as credit losses, which some characterize as misleading since some of the tranches within the mortgage-backed security are still performing.

The Chamber sent a letter on Thursday to Treasury Secretary Timothy Geithner, SEC Chairman Mary Schapiro and the Financial Accounting Standards Board Chairman Robert Herz.

The SEC already has given the financial industry some wiggle room and has said hard-to-value assets do not have to be marked down to fire-sale prices. But that initial guidance was not enough.

Now the SEC and FASB are working on more guidance to help banks determine the value of an asset when there is little or no market trading.

The SEC and FASB declined to comment.

Reporting by Kevin Drawbaugh, Rachelle Younglai; Editing by Tim Dobbyn and Carol Bishopric