FASB Backs Off Fair-Value of Loans Proposal After Opposition

The Financial Accounting Standards Board backed off from its plan to make banks use market values to calculate how much the loans on their books are worth.

The panel, which sets U.S. accounting standards, today approved a change to its proposal that will allow banks to report some financial instruments on their balance sheets at amortized cost, as they currently do, rather than at fair value. The biggest U.S. banks and the American Bankers Association had opposed the original plan.

FASB’s planned rule would have forced lenders to mark deposits and loans to market values as they already do for traded securities. Not all changes in the values of assets and liabilities would affect net income, since some fair-value adjustments can be recorded in what’s called “other comprehensive income,” a balance-sheet item added or deducted from equity.

“The vote today is a reflection of our due process at work and how important input from our constituents is in decision making,” said Neal E. McGarity, a spokesman for Norwalk, Connecticut-based FASB.

The original proposal, which prompted 2,814 comment letters to FASB since its May release, was opposed by lenders including Wells Fargo & Co. and Regions Financial Corp. and former Federal Deposit Insurance Corp. Chairman William Isaac, now chairman of Cincinnati-based Fifth Third Bancorp, Ohio’s largest lender.

The proposal also threatened FASB’s efforts to converge global accounting standards with London-based International Accounting Standards Board, which opposes such wide usage of fair-value accounting.

The Opposition

Lenders including Bank of America Corp., based in Charlotte, North Carolina, and San Francisco-based Wells Fargo already report the fair value of their loans in the footnotes of their quarterly reports to regulators. Reporting changes through other comprehensive income could cause swings of billions of dollars in their book values.

“Today’s shift recognizes investor concerns that a company’s business model should be a key factor in measuring financial instruments,” Frank Keating, chief executive officer of the ABA, said in a statement. “While mark-to-market can be very useful for a business that trades financial instruments, the most appropriate accounting measure for a loan portfolio is the loan balance minus impairment.”

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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