FASB Signals Stricter Rules For Banks' Loan Vehicles

Possible accounting rule changes spurred by the subprime-mortgage crisis would make it harder and costlier for banks to package and sell off loans. That could make borrowing more expensive for consumers and companies but prevent the abuses that led to billions in losses over the past year. The changes come at a time of scrutiny of how financial institutions packaged mortgages and other loans into securities, shifting the risk of bad loans from their own balance sheets to investors. The changes will "be a little bit like taking the punch bowl away," said Robert Herz, chairman of the Financial Accounting Standards Board, which sets U.S. accounting rules. Outlining the possible shape of these new rules during an accounting conference Thursday, Mr. Herz indicated that banks might have to keep on their books loans they previously packaged and sold off, or securitized. Under current rules banks create securitization vehicles that hold the loans off their balance sheets. The Securities and Exchange Commission earlier this year asked the accounting board to create rules for these vehicles by year's end. The FASB last month tentatively voted to do away with the special securitization vehicles, although it didn't signal how banks would have to account for them. In his remarks, Mr. Herz indicated banks will have to use other rules governing off-balance-sheet vehicles. These rules are likely to be tightened as well. Any change in the rules surrounding securitization vehicles and other off-balance-sheet entities could have widespread implications for banks. At the end of 2007, J.P. Morgan Chase & Co. and Citigroup Inc. had nearly $1 trillion in assets held off their books in special securitization vehicles. J.P. Morgan generated nearly $3.5 billion in revenue, or about 6% of total 2007 net revenue, from administering special securitization vehicles. In a statement, Citigroup said, "We are actively engaged in industrywide discussions on the development of the proposal." J.P. Morgan declined to comment. Mr. Herz didn't push the possibility that banks would be allowed to show the combined effect of these vehicles' assets and liabilities on their books. Such a linked presentation could prevent a ballooning of bank balance sheets. He also said banks likely will face stiffer tests overall for what can stay off their books and may have to take into account emergency-funding arrangements they often offer to off-balance-sheet vehicles.