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The U.S. Securities and Exchange Commission rejected calls by banks to suspend an accounting rule blamed for exacerbating the financial crisis, saying the “fair-value” standard should instead be improved.
“Fair-value accounting did not appear to play a meaningful role in the bank failures that occurred in 2008,” the regulator said in a statement today. The study, ordered by Congress, recommends changes in the accounting for so-called impaired securities and helping companies in determining the value of investments in inactive markets.
Banks including Citigroup Inc. say the rule, which requires companies to record assets every quarter to reflect market value, fails when buyers shun assets such as subprime mortgages. Proponents including the rulemaking U.S. Financial Accounting Standards Board say fair-value adds to transparency and gives investors information about companies.
“Although there are areas with which we do not agree, there are some with which we agree and have been encouraging the FASB to address,” Donna Fisher, senior vice president for tax and accounting at the American Bankers Association, said in an e-mail. By releasing recommendations today, the SEC may have helped some companies with their year-end reporting, she said.
The 211-page report recommends development of tools to help measure fair-value “when relevant market information is not available in illiquid or inactive markets.” The study proposes helping companies determine when markets become inactive and how the impact of a change in credit risk on an asset or liability’s value should be estimated.
‘No Significant Change’
“I see this as no significant change in current accounting, and that’s a good thing,” Charles Mulford, an accounting professor at the Georgia Institute of Technology in Atlanta, said in an interview. “It’s not changing how we’re doing things, just clarifying them.”
The report concluded that U.S. bank failures this year resulted from “growing probable credit losses, concerns about asset quality, and in certain cases, eroding lender and investor confidence.”
Congress gave the SEC 90 days to study fair-value rules when the $700 billion federal financial-rescue package was passed in October. Congress acted after 65 House lawmakers urged SEC Chairman Christopher Cox to suspend the rule.
“We applaud the findings of the study and will continue to work with the regulators” to implement the recommendations, Scott Talbott, chief lobbyist for the Financial Services Roundtable, whose members include New York-based Citigroup and Charlotte, North Carolina-based Bank of America Corp., said in an e-mail.
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