Banking Law

Are New U.S. Accounting Rules Bad News for Banks?

The last few months have not been good ones for the global banking industry, as rapidly rising mortgage defaults sparked a credit crisis. But the situation may get even worse before it gets better. And, if so, new U.S. accounting standards may be one big reason why, a British columnist says.

Although “FAS 157” and “FAS 159” are federal accounting standards that apply only to companies regulated by the United States, they will soon become worldwide benchmarks for evaluating “level-one,” “level-two” and “level-three” bank assets. While requiring banks to rate the quality of the assets they hold may well be an excellent idea, these regulations couldn’t have come at a worse time, writes William Rees-Mogg in the London Times.

That’s because the regulations are putting a spotlight on “level-three” assets–which include, but certainly aren’t limited to subprime mortgages–at a time when the global banking market is already reeling from more and more bad news about subprime defaults. “(T)he defaults on sub-prime mortgages have lowered the acceptability of all level-three assets,” the article explains. “No one knows what they are worth and hardly anyone wants them.”

Thus, the end result of these “perfectly reasonable regulations” could be dire, Rees-Mogg writes: “The global banking system now faces the risk of a general flight towards cash and liquid level one assets on a scale that has not been seen since the early 1930s.”

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