The financial sector is waging a lobbying war on Capitol Hill to delay the the implementation of a new accounting rule set to take effect at the beginning of next year. The rule would ban the use off off balance sheet vehicles to shift risk away from their bottom line.
Banks love special purpose entitites because they can skim off the profits without having to set aside regulatory. And they worry that the new rule could force them to raise more capital to reserve against the assets.
The rule was approved earlier this year by the Financial Accounting Standards Board (FASB), the nonprofit organisation that sets accounting rules, and is slated to take effect Jan. 1.
The nation’s biggest banks and real estate interests are leading the charge in the effort because the securitization process for residential and commercial loans relied heavily on the special vehicles.
When federal regulators stress-tested the country’s 19 largest financial institutions this spring, they concluded that the accounting rule could shift $900 billion in assets onto bank balance sheets.
That shift would require firms to increase capital to meet regulatory obligations, although the stress-test results took those requirements into account. The new requirements would affect all banks, not just the 19 largest. Industry groups say the rule could force banks to raise tens of billions of dollars in new capital
John Courson, president and chief executive officer of the Mortgage Bankers Association (MBA), said the accounting rule “may hinder the current economic recovery under way.”
“With any increase in required capital, a banking institution is likely to reduce the amount of lending using such securitization vehicles, as well as other lending,” the American Bankers Association wrote in a letter to regulators.