If you think it is possible that the economy has not seen enough distress in this recent period, look out; the Financial Accounting Standards Board (FASB) looks to ride onto the financial battlefield with bayonets affixed, and indiscriminately end any signs of financial life.
FASB’s latest move to mark-to-market bank’s balance sheets and specifically their loan portfolios will devastate the entire industry. This is a not a small bank versus big bank issue. Current capital standards will not be anywhere near sufficient to keep any size bank in regulatory compliance.
It will reinforce the devastating pro-cyclical nature of our current financial and regulatory structure at a time when exactly the opposite is needed. It greatly undermines the availability of credit at a time when it is so sorely needed. The entire economy will suffer as banks withhold lending, and change the types of lending that have become so commonplace. Long maturity loans, such as the most common 30 year fixed rate mortgage, will become a thing of the past, as variable rate loans become the only type banks will pursue. Even loans that are performing perfectly would likely need to be written down from the day they are made. How will loans made on the concept of character, or relationship be made in this environment? As most Community Banks move to capture relationships from their clients, FASB will penalize this approach, as it forces the mark down of any loan, and will be based on highly speculative information in a very depressed marketplace.
Bank capital levels, already under stress, will again be under assault, not because of real losses, but because of a rule making change. This may in fact be one of the biggest accounting changes we have ever seen.
The volatility of interest rates, and the stimulative effects of the Federal Reserve easing could potentially have the effect of wiping out bank capital when any tightening begins to take place. In other words, just as the economy would begin to brighten, FASB would be standing ready to deliver a fatal blow to any resurgence.
FASB needs to reconsider this ill-timed move, and allow for the proper discussions to take place, and carefully consider all the ramifications that this will have to not only our financial system, but to the entire economy.