Capital Requirements for Banks an Ongoing Battle

June 20, 2012 by · Leave a Comment
Filed under: General 

Nobel prize-winning economist Robert Engle has said that American banks, as a whole, are short $500 billion in capital, despite Basel III requirements that have increased capital requirements and tightened capital rules. In the Reuters “Counterparties” email, Ben Walsh describes the situation as laid out by Engle.

To make matters worse, European banks are even more capital-deficient according to Engle’s calculations. This is the result of derivative accounting rules that differ in Europe, notes Walsh.

Due heavily to the fallout surrounding JPMorgan Chase’s $2 billion hedge accounting loss, “there’s something of a bipartisan consensus for stronger bank capital requirements for America’s banks,” says Walsh.

Against the requests of banking officers like JPMorgan Chase’s Jamie Dimon, new capital regulations proposed by the Federal Reserve are likely to require that banks hold more equity. Additionally, with the Federal Reserve proposing mark-to-market accounting for banks’ securities portfolios, capital requirements are likely to climb even higher.

PCAOB Data: Fair Value Deficiencies Have Doubled Since 2009

June 18, 2012 by · Leave a Comment
Filed under: Fair Value Accounting 

In an analysis of Public Company Accounting Oversight Board (PCAOB) data, Atlanta-based valuation and litigation consultancy firm Acuitas, Inc. found that fair value issues dominated the recent landscape of noted deficiencies in audits. The full report titled “Survey of Fair Value Audit Deficiencies,” analyzed three years of PCAOB data regarding audits and inspections.

Mark Zyla, managing director at Acuitas, Inc., said there were two significant trends that emerged from the report. First, “the percentage of audits that have deficiencies has more than doubled since 2009. Secondly, “fair value and impairment audit issues have contributed significantly to this increase in the number of these deficiencies.”

According to Zyla, “The information contained in the survey should benefit public entities and their auditors, and by extension, private entities and their auditors – by helping them understand the underlying causes of fair value measurements and impairment audit deficiencies, as reported by the PCAOB in their latest inspection reports.”

Federal Reserve to Issue New Capital Rules

June 15, 2012 by · Leave a Comment
Filed under: General, Market News 

The United States Federal Reserve is proposing new capital rules for banks. These rules, which are capital requirements put in place by the Federal Reserve to mitigate volatility, would set a standard for how much cash and capital a bank must keep on hand to offset its debts and loans.

Almost immediately, large U.S. banks and lenders like Citigroup and Wells Fargo have decried the proposal, saying that “the net effect of the change will force them to hold more capital over and above the stated requirements,” according to an article by Shahien Nasiripour in the Financial Times. Additionally, “because of different accounting treatments, their foreign peers will have their capital levels protected from changes in the market value of some securities holdings,” Nasiripour continues.

The accounting treatment that concerns U.S. banks involves those portfolios designated as “available for sale.” These holdings, according to U.S. accounting rules, are to be booked using mark-to-market accounting.

European banks, as Citigroup and others have noted, are not required to mark these portfolios at market value.

Bain: Mark-to-Market Helped Bolster Private Equity Gains

June 13, 2012 by · Leave a Comment
Filed under: General 

In a contribution to Forbes and in Bain’s Global Private Equity Report 2012, Bain & Company said that the private equity industry’s recent positive returns were a result of a transition to mark-to-market accounting rules.

Private equity firms, says Bain, “promptly and aggressively wrote down their portfolio company net asset valuations” when equities took a tumble in late 2008. But following that, portfolio companies continued to be conservatively priced despite a public recovery. Meanwhile, portfolio values marked at market value continued to rise, helping boost quarterly gains throughout most of 2010 and 2011 for the private equity industry.

Currently, private equity is facing a new set of challenges, says Bain. “With private equity assets now appraised close to their intrinsic value, returns will become more volatile as they more closely track the ups and downs of the public markets,” the article reads. “Gross Domestic Product (GDP) growth, multiple expansion and leverage,” says Bain, “do not look nearly as favorable in the current recovery as they had in past ones.”

The Economist: U.S. Adoption of IFRS “Seems Off the Table”

A Schumpeter blog at The Economist online recently discussed the convergence process between the United States-based Financial Accounting Standards Board (FASB) and the International Accounting Standards Board after a recent conference at Baruch College in New York. Top brass from the FASB and the Securities and Exchange Commission (SEC) were on hand to discuss the convergence process and potential adoption of International Financial Reporting Standards (IFRS) by the United States. The SEC is currently reviewing whether or not to adopt IFRS, with a decision expected fairly soon.

But The Economist’s bloggers remain pessimistic of such an adoption or merger. “A wholesale adoption of the international standards now seems off the table,” it reads. The FASB seems likely to remain in power, utilizing an “endorsement” of international standards instead.

“American critics of IASB make several points, many to do with fair-value or ‘mark-to-market’ accounting of financial instruments,” the editorial notes. The difference between the two schools of thought has narrowed, though a gap remains. The IASB still prefers that assets be booked at historical cost; the FASB has softened and is now considering a “three-bucket” approach which would book some assets, depending on their characteristics, at either market value or historical cost.

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