Academic journal article ABA Banking Journal

Playing the Numbers Game by a Fair Set of Rules

Academic journal article ABA Banking Journal

Playing the Numbers Game by a Fair Set of Rules

Article excerpt

Banking has always been an accountant's game. But some academics and accountants now read that as "fair game.

That's one way to explain a growing interest in imposing market-value accounting on the industry-a move ABA opposes.

Market-value accounting is the subject of a study of financial instruments by the Financial Accounting Standards Board. It's also under examination at Treasury as part of its pending study on deposit-insurance reform.

The Securities and Exchange Commission strongly supports a move to market-value accounting. And late this summer, the senior rule-making body of the American Institute of Certified Public Accountants (AICPA) was prepared to introduce a limited mark-to-market proposal that would have sent bank-income-statement volatility into warp speed.

Action works. Thanks to much early legwork by ABA, the AICPA's Accounting Standards Executive Committee initially chose to drop its proposal-at least for now. Its unanimous vote in September ended, for a time, concern over a proposal that for bankers was basically unworkable. Make no mistake about it, this issue will come back. In early October, in fact, the committee agreed to consider a Securities and Exchange Commission request that it revisit the matter

The favorable vote in September came after an ABA letter-writing campaign that was at least partly responsible for what The Wall Street Journal called "overwhelmingly negative feedback from banks and accountants." Of the 254 comment letters that reached the AICPA committee by its Aug. 1 deadline, just two approved of the proposal without change. A full 90% opposed the plan.

Why such opposition? For starters, the proposal would require banks to revalue a significant portion of their securities portfolios at the lower of historical cost or market value.

AICPA's proposal sought to control gains trading, or "cherry picking," a practice which saw many S&Ls in the 1980s selling off higher-valued securities in order to show paper gains.

However, the proposal went too far in trying to control valuation of investment portfolios. …

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