Will Proposed FASB Rules Dry Up Capital for Businesses?

Crain's Detroit Business had a big article in their September 17 issue titled The Price Of Change - Proposed Accounting Rules Could Cry Up Capital For Business, Banks Say by Tom Henderson.  I met Tom Henderson several years ago (don't know if he remembers me) and have generally enjoyed his columns.

This one is different.  It reads as if it was written by a bank lobbyist who doesn't like what the FASB is up to.

The basic premise of the article is that a FASB proposal to make banks determine the resale value of commerical loans in their portfolios and change the value of the loans as interest rates rise and fall will reduce the amount of money they have available to lend.  The article goes on to say that once interest rates rise, banks will have to lower the value of loans, as they will now be less attractive.  They also think it is a "pointless exercise, since the value of those loans is in the cash they generate as they are paid off, and that there is no resale market for them."

I'm not buying this argument.  I also don't buy the argument that other FASB rules caused the near melt down of the credit markets a couple of years ago.  These banks don't want to do what many other businesses with financial assets have to do - mark them to market.  In one sense I don't blame them, because it isn't an easy thing to do.  However, the reader of the financial statements wants to know the value of the assets.  Keeping them on an amortized historic cost doesn't tell them that.

More importantly, I think what this really shows is a fault in the regulatory model, or perhaps a failure to consider if the regulatory model will change.  Fundamentally, the bank before implementation is the same bank after implementation.  Various measurements will change.  In turn, the regulations will have to change to accomodate the new measurements.  To wholesale say that a FASB proposal is going to dry up all lending is going way too far.

To Tom's credit, he does put in some alternate opinions.  I was somewhat pleased to see that Deloitte, my first employer, recognized what the FASB is trying to do: come up with the best model to determine fair value of the loans. 

Maybe I'm on the wrong side of this one, but my gut is telling me that the world isn't going to fall apart of the proposed rule goes into effect.

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Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies. Joel writes observations on different matters and especially on working with and using LinkedIn. He thinks he has a sense of humor.

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