U.S. regulators squeeze banks on future tax assets

By Dan Wilchins

NEW YORK (Reuters) - U.S. regulators are looking hard at banks' expected future tax benefits and the result for some financial institutions could be more writedowns.

Any charges are much more likely to hurt regional and community banks, than the largest U.S. lenders, who have more ways to preserve the benefits, known as "deferred tax assets," or DTAs.

The most common reason for a bank to write down these assets is an expected lack of taxable income in the future. As income becomes less likely, regulators including the Federal Deposit Insurance Corp are pressing banks to write them down, experts told Reuters.

Regulatory pressure often means that, at the margin, accountants are inclined to be much more conservative when evaluating these assets.

"As long as the FDIC is looking at this, writedowns will be much more widespread," said Jim Goeller, a partner at tax firm Perry-Smith in San Francisco, which audits more than 60 banks in California. An FDIC spokesman said the agency looks at all assets on the balance sheets and expects banks to follow accounting rules.

Publicly traded banks have about $134 billion of deferred tax assets on their books, according to SNL Financial. In that sense, the problem is small compared with the $1.7 trillion of commercial real estate on companies books, for example.

But for some banks, valuation adjustments can be serious. Consider The South Financial Group Inc (TSFG.O), which recently wrote down its deferred tax asset by $200 million.

The writedown, known as a valuation allowance, had little impact on its regulatory capital levels. But it did influence its tangible common equity, a measure of capital increasingly important to stock investors and debt rating agencies.