The Financial Accounting Standards Board is likely to propose that banks expand their use of market values for financial assets such as loans, impacting up to $2.8 trillion in assets at Citibank (NYSE: C), Bank of America (NYSE: BAC), JP Morgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC), according to a new report from the WSJ citing anonymous sources.
The move that is likely to be proposed is a departure from current practices in which banks hold mark their loans at their original cost and create a reserve for potential losses based on their own views of the risk on the loan. If the proposal is implemented, the shape of income statements and the metrics used by investors to evaluate financial institutions could change significantly.
As cited above, the four largest banks including JP Morgan Chase, Bank of America, Citigroup and Wells Fargo will see up to $2.8 trillion or about 40% of their assets affected. Smaller banks would likely see a higher percentage of their loans affected because more of their loans are not marked to market prices.
If the rules are proposed as expected, banks will likely put up a major fight to stop the rule change. Banks are generally opposed to mark-to-market rules, because they believe that loans are evaluated on market prices that are too-often irrational. The market value of certain types of loans fell excessively during the onset of the financial crisis and many bankers and bank regulators believe that the rules worsened the severity of the financial crisis.
Under the rules that are likely to proposed, Banks would have to show loans on their balance sheets based on historical cost and then adjust them for both market values and loan-loss reserves. Banks would also have to divide their financial holdings between those they trade and those they intend to hold. Finally, income statements would show more than just net profit. It would also show an “other-comprehensive-income” category reflecting changes in the market value of loans and securities.
