Accounting changes expected to take effect by 2009 will add $5 trillion to the balance sheets of banks and other U.S. financial institutions, says Citigroup’s head of global credit strategy Matt King.
The changes will return to banks’ books the majority of the assets that were securitized previously — but those assets will not need to be funded, King told the Financial Times.
"The funding is still very much out there, but at the same time, there are significant questions about the effect this is going to have on capital ratios," King says.
King says that although the Financial Standards Accounting Board has been considering these changes for some time, recent pressure from the SEC is speeding up the process, a move he finds worrisome.
"We're nervous that they're doing it too quickly," King says. "The key thing is how the Fed and other regulators respond with respect to capital ratios.”
"If they push this through by year-end and the regulators haven't made clear what their position is, it creates enormous uncertainty for banks in respect to their own capital positions.”
The impact the changes will have on the way banks conduct their business is unclear, King says. But if capital relief were not given, then the capital ratios of all U.S. banks would deteriorate very significantly, quite possibly by 30 percent or more.
“There’s been a lot of pressure for banks and other financial institutions to recognize their remote, off-balance sheet liabilities beginning with SIVs,” King says, pointing out that the whole idea behind SIVs was that because they were off-balance sheet and remote, banks didn’t incur any liability for them.
King speculates that because of the huge amount of money that’s involved, the Fed may simply want to see the assets on balance sheets for accounting purposes but not consider them as regulatory capital.
However, the fact that virtually all of the different banks chose to bail out their SIVs raises questions about how remote these products really are, and it may well lead regulators to wonder if there are other things they should be looking at regulating as well.
And while strictly speaking the changes will only affect U.S. financial institutions, King says it seems likely that European banks — with no accounting change whatsoever — will come under even greater pressure to de-lever their positions by raising a good deal of equity or seriously cutting back on lending.
King is even more pessimistic about the credit crunch. “When you look at things like corporate loan growth, it’s just beginning to slow,” he says. “But banks have $6 trillion in undrawn loan commitments, many at tight spread levels that will be difficult to fund in outright terms.”
“It looks to us like the banks have just been hoping the problem would go away, that their funding costs would come down again,” King says and unfortunately, though we’ve had the majority of writedowns for SIVs, consumers are just beginning to feel the effects, he added
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