Bank-capital standards and accounting rules should be ‘decoupled’

As reported in a recent article on the Dow Jones News Service, Robert Herz, chairman of the Financial Accounting Standards Board, has suggested that "bank-capital standards and accounting rules should be "decoupled," so that the government's determinations of whether banks are stable wouldn't necessarily be affected by accounting changes."

According to the article, the comments by Robert Herz "...were an apparent attempt to defuse a confrontation between FASB and the banking industry over "fair-value" accounting, which requires companies to peg the value of their assets to market prices."

Herz said the solution is not to alter accounting rules, but for bank regulators to exercise more flexibility in how they measure banks' capital.  FASB and regulators have different missions, he said, and neither should drive the other or be subordinated to the other.

"Handcuffing regulators to GAAP or distorting GAAP to always fit the needs of regulators is inconsistent with the different purposes of financial reporting and prudential regulation," Herz said in prepared remarks for his recent speech.  Decoupling, he said, "could enhance the ability of both the FASB and the regulators to fulfill our critical mandates. We can continue to work with independence and an unwavering dedication to market transparency; at the same time the bank regulators can utilize their authority to take whatever actions are required to keep the financial system stable and healthy."

I agree.

 Standards & Regulators  0 Comments December 14th, 2009