Quadruple Whammy: Regulatory Agencies' Final Rule on FAS 166/167

It's always totally cute when they hold hands and play nice together, isn't it?

Agencies Issue Final Rule for Regulatory Capital Standards Related to Statements of Financial Accounting Standards Nos. 166 and 167
(via the Fed Board of Governors):

The federal banking and thrift regulatory agencies today announced the final risk-based capital rule related to the Financial Accounting Standards Board's adoption of Statements of Financial Accounting Standards Nos. 166 and 167. These new accounting standards make substantive changes to how banking organizations account for many items, including securitized assets, that had been previously excluded from these organizations' balance sheets.

Banking organizations affected by the new accounting standards generally will be subject to higher risk-based regulatory capital requirements. The rule better aligns risk-based capital requirements with the actual risks of certain exposures. It also provides an optional phase-in for four quarters of the impact on risk-weighted assets and tier 2 capital resulting from a banking organization's implementation of the new accounting standards.

The final rule, issued by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of Thrift Supervision, will take effect 60 days after publication in the Federal Register, which is expected shortly. Banking organizations may choose to comply with the final rule as of the beginning of their first annual reporting period after November 15, 2009.

FAS 166 and FAS 167, among other things, establish new standards for reporting companies’ transfers of assets to special purpose entities, known as variable interest entities (VIEs) under GAAP, and for consolidating VIEs. Under FAS 167, banking organizations may be required to consolidate assets, liabilities, and equity in certain VIEs that were not consolidated under the standards that FAS 166 and FAS 167 replaced.

Most banking organizations will be required to implement the new consolidation standards as of January 1, 2010. The agencies’ risk-based capital and leverage rules (collectively, the capital rules) generally would require a banking organization to include assets held by newly consolidated VIEs in its leverage and risk-based capital ratios determined under those rules. At the same time, a consolidating banking organization may need to establish an ALLL to cover estimated credit losses on the assets consolidated under FAS 167. As a consequence, absent a change in the capital rules and all other factors remaining constant, both the leverage and risk-based capital ratios of banking organizations that must consolidate due to FAS 167.

In case your ass has been under a rock for the last year, FASB came after banks' asses over the summer. Miraculously, the Fed encouraged this switch, leading me to believe they're just trying to cover their tracks. (see also my June 12th Fed Embraces FASB Changes, Toxic Asset Shuffle if you need a remedial lesson in capital requirements, Fed shenanigans, and general financial bullshitting.)

This ought to be fun to watch.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.