WASHINGTON (Reuters) — Banks on Tuesday pleaded with regulators to immediately clarify fair value accounting rules and said failure to do so would negate the government's efforts to shore up the financial sector.
The Treasury Department has earmarked $250 billion to inject directly into U. S. banks in a bid to revive credit markets and restore faith in the banking system.
But the American Bankers Association, which lobbies on behalf of all U. S. banks and thrifts, said fair value accounting rules will undo much of the work of Treasury's capital purchase program.
"While the government makes billions of dollars available to increase capital, other policies simultaneously are needlessly, and wrongly, erasing billions of dollars in bank capital, " ABA said in a letter addressed to Treasury Secretary Henry Paulson.
The letter, dated November 25, was copied to key lawmakers, U. S. Securities and Exchange Commission Chairman Christopher Cox, Federal Reserve Chairman Ben Bernanke and Timothy Geithner, president of the Federal Reserve Bank of New York.
ABA said immediate action was needed and urged the SEC to clarify certain aspects of fair value accounting, which requires assets to be valued at market prices.
Under fair value, or FAS 157, assets can be valued based on a simple price quote in an active market. The hard-to-price assets rely on management's best estimate derived from computer models.
Among other recommendations, ABA said the definition of fair value should be based on a willing buyer and willing seller rather than the so-called exit price, or the price at which the asset would be sold.
"We simply cannot wait any longer, " ABA's president Edward Yingling said in the letter. «In a few weeks banks will be required to prepare their year-end financial statements.»
The SEC has already taken steps to clarify the accounting rule. In October the agency told financial services firms that they did not have to use fire sale prices when evaluating their hard-to-price assets.
As part of the government's $700 billion bailout law, the SEC is required to produce a study examining the effects of FAS 157 on financial firms and alternative accounting standards.
Geithner has been nominated by President-elect Barack Obama to serve as Treasury Secretary.
(Reporting by Rachelle Younglai; Editing by Brian Moss)
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