A group of lobbying associations, including the US Chamber of Commerce, the Mortgage Bankers' Association and various bodies from the property and insurance industries, have warned US Treasury secretary Timothy Geithner the new rules on consolidation "will impact capital and liquidity necessary for lending and other important services. In turn, these changes will affect US financial institutions and the secondary markets that fuel borrower access to credit".
The FASB said in May it would release the rules this month, which would be become effective by the end of the year – meaning banks' fourth-quarter 2009 results would have to be calculated under the new criteria. But so far no rules have been released: although the FASB said they had been finished by mid-May, no details have been released on exactly when, or even if, they will be published.
Most major US banks have not released estimates of the affect of the new rules on their capital structures – with the exceptions of Citi and JP Morgan. Citi revealed in its most recent quarterly results the new rules would force it to consolidate off-balance-sheet assets worth $165.8 billion on to its balance sheet, equivalent to an additional $10.9 billion in risk-weighted assets.
This represents only a small share of the $1.03 trillion total assets of all the off-balance-sheet vehicles with which Citi is involved. "Due to the variety of transaction structures and level of the company's involvement in individual [vehicles], only a subset of the [vehicles] with which the company is involved are expected to be consolidated under the proposed change," Citi commented in its results. The $10.9 billion increase in risk-weighted assets is small compared with the bank's existing $1.02 trillion in risk-weighted assets, and is unlikely to hurt Citi's Tier I capital ratio, which stood at 11.92% at the end of the first quarter of the year.
JP Morgan predicted a more severe effect in its most recent quarterly results, with the new rules forcing the consolidation of "up to $145 billion" in assets, pushing its Tier I capital ratio down by 80 basis points to 10.6%, which will fall further to 8.5% after its repayment of federal bail-out funds under the Troubled Assets Relief Program (Tarp), announced yesterday.
Although it is still impossible to know the full extent of the additional capital the new standard would require, the need to raise new capital would run counter to US banks' desire to pay back Tarp lending as soon as possible, to escape the compensation limits and other restrictions that Tarp imposes on its subject banks. Delaying the new rules would allow banks to go ahead with plans to repay Tarp funds, and give them more time to raise the additional capital needed through usual market methods.
The lobbyists' letter suggested Geithner should push for a delay in the introduction of the new rules, arguing the change would be best introduced in parallel with a similar overhaul of international standards by the International Accounting Standards Board (IASB). The planned IASB standard will be published "in the second half of 2009". This would make it difficult for a new standard to come into play in time for fourth-quarter 2009 results. But after delaying the implementation for a year last July, the FASB and US Treasury might not be willing to agree to another concession to the industry.