Magazine article American Banker

Battle Lines Drawn on Market-Value Accounting: Opponents Cite Capital Fluctuation

Magazine article American Banker

Battle Lines Drawn on Market-Value Accounting: Opponents Cite Capital Fluctuation

Article excerpt

Bank capital would fluctuate with interest rate changes under a regulatory plan to marry accounting and capital standards, according to bankers who oppose the plan.

More than 90% of the banks that sent comments to the Comptroller of the Currency argued against the proposal. Many fear that the new rule would unfairly subject banks to the punitive effects of other regulations, such as prompt corrective action. Those rules impose increasingly severe penalties as a bank's capital falls.

Bankers also said the new rule would produce perverse results.

"This proposed rule would make sick banks look healthy when rates are in a declining mode and healthy banks look sick when rates are in a rising mode," wrote Byron K. Bexley, president of Converse National Bank, Universal City, Tex.

Affect on Tier 1

While Converse National had a Tier 1 capital-to-assets ratio of 5.58% on March 31, implementation of the rule would reduce it to 5.30%, he said. As rates continue to rise, he said, the ratio would be pushed even lower.

Several commenters said if this rule had been passed 15 years ago when interest rates hit historical highs, many healthy banks would have been closed.

Conversely, under the rule customers could be misled into believing that some banks are stronger than they really are, said W, Gerard Huiskamp, president of Blackhawk State Bank, Milan, Ill.

"Supposedly, one of the intents of FAS 115 is to give greater understanding of the financial statement to the investing public and the depositing public," he wrote. "It is time to step back from that proposal and see that the result is confusion rather than understanding."

Some bankers said the proposal could trigger a crisis.

"In my 34-year banking career I have not seen, with the exception of 'deregulation' that led directly to the savings and loan crisis, a proposed set of rules that is going to have a more devastating effect on the banking industry on the whole, on competition within the industry, and on the consumer," said Klaus Golombek, executive vice president of the National Bank of Bremerton, Wash. …

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