FASB Changes Bank Rule

Apr 3rd, 2009 @ 4:06 PM by Alden Smith

On Thursday, an obscure accounting rule was changed to give banks more discretion in reporting the value of mortgage securities.  Supposedly, it would allow banks to report higher profits by assuming that the mortgage-backed securities in their portfolios are worth more than they actually are.

The reasoning behind this appears to be banks feel that the mortgage-backed securities, which had taken a huge hit during the subprime mortgage crisis, should be reported for what the banks feel they are worth, not what investors are willing to pay for them.

Critics of this move said that the rules were changed under heavy political pressure.  They also say this move will compromise the independence of the Financial Accounting Standards Board.

During the financial crisis the market value of a lot of securities – especially prime mortgage backed – plunged to a fraction of their original worth.  Banks were forced to report hundreds of billions of dollars in loss during the past year because of this.  According to the New York Times, some of these securities must be reported at market value every three months.  Now, it appears that banks will be able to report on the securities for what they estimate they are worth, instead of the actual value.

This makes little sense.  Trust in banks is currently at an all-time low.  All this rule changing will do is make investors feel a little bit better about the securities they are dealing with.  It has nothing to do with actual value.

FASB is not happy with this rule change, but yet voted for the changes anyway.  One board member, Lawrence W. Smith, said that “there is perception that we are yielding to political pressure.  We are an independent standards that are in it is important that we maintain our independence.”

I have this question for Mr. Smith.  If you feel that this rule change will hurt the credibility of FASB, why did you vote for change?

One Response to “FASB Changes Bank Rule”

1. Roberta-Luy says:

   January 4, 2011 at 3:21 pm

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