Blaming former rules which allowed banks to effectively keep assets and liabilities off of their books and look stronger than they actually were, the Financial Accounting Standards Board changed that to where billions of assets and liabilities would now be forced to be listed on the books of banks like Wells Fargo (NYSE:WFC), Citigroup Inc. (NYSE:C), Bank of America Corp. (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM), which would then require them to raise more capital to support their burgeoning balance sheets.
Understanding it would be difficult to immediately raise the required capital, the Federal Deposit Insurance Corp. (FDIC) extended the period of time the banks have to raise the needed capital to six months.
The change in the period of time to raise the capital was approved by the Financial Accounting Standards Board, and the needed capital will start to be raised by the banks in January 2010, as the phase-in period begins.
The banks claim the additional capital requirements will seriously hamper their ability to finance a number of consumer products, including mortgages, credit cards and student loans. All of these would be cut according to a number of the banks, as capital is directed away from products to the requirements instead.
What caused this all to happen were the rules which allowed banks to have obligations which didn’t have to be listed on the books. Consequently, off-balance-trusts were sold a pool of loans which were than repackaged as securities backed by mortgages. What was hidden was the securities were backed by failing mortgages, information investors didn’t have access to because they weren’t listed on the books.
FDIC Chairman Sheila Bair said that while “We’re still recovering from the damage these structures caused,” dealing with it must take into account the “very fragile stage in our economic recovery,” the reason the extended period of time was offered to the banks.
