Federal regulators' new rules do little for smaller banks

Federal officials and regulators grabbed control of large parts of the banking industry after the housing meltdown and credit crisis, but in one area they have suddenly loosened their grip.

Earlier this month, the Financial Accounting Standards Board voted to allow banks more freedom to determine the value of mortgage-based real estate securities on their own. Previously, those assets were tied only to the booms and busts of the housing market — great for banks a few years ago, but not so much now.

"By and large the smaller community sized banks have not been all that affected," said Jeff Reynolds, a consultant for banks in Southwest Florida and elsewhere with Darling Consulting Group, Inc. in Massachusetts. "If you see a smaller bank down there that's been in trouble, it's probably related to construction or some type of land development lending."

The new rule is set to change the status quo of the "marked-to-market" accounting principle that requires firms to revalue their mortgage-based securities every three months based on whatever the market price is. Markedto market, also known as fair value accounting, was set in the early 1990s, to keep banks from overvaluing their assets. Critics say this change will allow them to do that again; and also that FASB, pronounced FAS-bee, bowed to political pressure from Congress to relax the rule at a time when banks are struggling.

Supporters say the change could increase consumer confidence by showing the assets at a higher value and give the banks a stronger financial standing, which might help free up some loans. It is intended to allow banks to value those declined securities at a fair, reasonable level, neither at today's drastically deflated market price, nor at the inflated prices of boom years. But it's not yet clear if the banks will use the new rule to revalue their assets at a more accurate level; or if consumers will take those higher numbers seriously enough to base investments on them if they do.

Community banks and even regional banks around Lee and Collier counties, such as RBC Bank, Florida Gulf Bank, Edison National Bank and Naplesbased Bank of Florida Corp., say the rule will only help much larger firms — typical examples include Citigroup, Countrywide, JP Morgan Chase & Co. and Northern Trust Corp. (Although

Citigroup recently told The New York

Times that the new rule would have no affect on its statements either.)

"My thinking is it's probably going to be something that prevents needless acceleration of losses for a lot of the larger banks and that definitely has a spillover effect for the wider economy," Mr. Reynolds said. "It prevents the needless destruction of capital at a time when it's very difficult to go out and raise capital."

Bill Valenti, president of Florida Gulf Bank, said the rule won't affect his bank because they haven't invested in mortgage-based securities. But like other community bankers, he sees the new rule as a favorable change.

"I think it's unreasonable to say where we are in a short-term market that all of those securities are worth next to nothing," Mr. Valenti said. "It seems like there is a value there. If you can hold on to these less-than-stellar mortgages, history has taught us that most people pay their mortgage if they can, and over time they'll be worth more than zero. At least the regulation now will require people to do some deeper analysis rather than saying there is no market and therefore they're worthless."

Florida Banking Association President and CEO Alex Sanchez lobbied for the FASB change in marked-tomarket, but is disappointed the new rule does little for small banks. He says FASB could have helped community banks by making changes not only to mortgage-based real estate securities — which has a direct effect on some large banks — but specifically on land-based real estate, which he says could help community banks value their assets at a higher level as well. That would have required a change to another seemingly obscure rule, FAS 114.

"I'm happy that some changes were made to FASB, but it didn't go far enough," he said. "Changes to FASB 114 were not included and we were very disappointed in this. That's what we really need. Look at the tanking and deep changes to real estate values in our state. That's what would help community banks most."

Most bankers and analysts say the changes to the mark-to-market rules could help shore up the larger banks' debts, which might help smaller banks in the long run.

Tracy Keegan, executive vice president and chief financial officer of Naples-based Bank of Florida Corporation, also said the new rule won't affect her bank much. But taking the view of larger investment companies, she added, "When they take those values based on a non-orderly market, they're taking a real hit on capital."

Banks like RBC, a regional bank in Naples and elsewhere, also won't be helped much by the new rule, although Richard Murray, RBC group president in Florida and Alabama, is also in favor of it.

"RBC, as neither a money center bank nor a substantive investment bank, has not been affected as much by this principle as many banks have," Mr. Murray said in an e-mail message. "The majority of the banks in the U.S. are regional banks or community banks and are therefore not as materially affected by mark-to-market accounting as the money center banks, investment banks and insurance companies are.

"My own personal opinion is that the pros have outweighed the cons as the ultimate value of many of these hard-to-value securities is permanently impaired."

He added, "The relaxing of the rule will likely be helpful, but it remains to be seen."