U.S. bank clean-up may clash with accounting reforms

By Al Yoon - Analysis

NEW YORK (Reuters) - An expected revision of two key accounting rules governing toxic banking assets may add a whole new layer of complexity to the U.S. government's attempts to cleanse the balance sheets of the nation's banks.

On Thursday, following intense pressure from Congress, the Financial Accounting Standards Board is likely to water down some mark-to-market rules often blamed for exacerbating the financial crisis by forcing banks to value troubled assets at distressed levels and take resulting hits to their earnings.

On the one hand, some market participants think softer rules will be a disincentive for banks to bite the bullet and sell their toxic assets to investors.

"Banks and insurance companies have every incentive to hold their securities and wait for accounting relief," Amherst Securities Group analysts said in a research note.

But banks and securities industry lobbyists say that the changes to one rule, FAS 157, do not go far enough and could increase the risk that a fire-sale price set by federal programs will unintentionally translate into a big hit to other assets on their balance sheets. Banks argue that they should have more leeway to ignore fire-sale prices, particularly when they are not for identical assets.

Some experts likened the accounting issues to similar problems in the U.S. housing market where foreclosure sales are often at prices below most perceptions of the values of similar properties in a neighborhood.

"It's asking if someone is willing to buy something on the courthouse steps, and that's not right," said Mike Heflin of FTN Financial's structured finance group in Memphis, Tennessee.

The Commercial Mortgage Securities Association (CMSA) says the factors still proposed by FASB to determine if a transaction is distressed are flawed, increasing the chance that assets could be valued based on transactions at artificially low prices.