Accounting Rules will rattle banks

Accounting rules may add another complication. Under purchase-accounting guidelines that take effect at the end of this year and will apply to deals closing in 2009, an acquirer effectively will have to mark a bank's loan portfolio to market prices, even though those loans currently are carried at their cost, or par value. Since many bank loans are under pressure and at risk of default, that process would require the buyer to pony up additional equity, essentially inflating the deal's price tag. Bankers say that purchase-accounting rules could become an impediment to financial-services deals. Instead, an increasing number of small and midsize banks are trying to raise cash by selling shares to the public. While that boosts capital levels, it also erodes the value of existing shareholders' positions. Some banks are expected to line up outside investors to "backstop" such offerings by agreeing to buy a certain amount of the new stock. Those arrangements are meant to reassure investors who are wary of putting their money in financial stocks.