FASB Tightens off-Balance-Sheet Loan Rules

The board that sets U.S. accounting standards on Monday moved to end the use of a bookkeeping device that allowed banks to park hundreds of billions of dollars in loans off their balance sheets and that has been blamed for stoking financial companies' losses as the housing market collapsed.

The change will tighten the use of so-called "qualifying special purpose entities" by requiring banks and other companies to report to regulators the loans contained in the entities and to increase their capital reserves in proportion as a cushion against potential losses.

It was the lack of disclosure and absence of capital supporting ballooning subprime mortgage loans in these special entities that aggravated the massive losses sustained by banks, regulators say.

The move by the Financial Accounting Standards Board "addresses the critical need for continued improvement to the accounting for arrangements that were at the epicenter of the financial crisis," James Kroeker, acting chief accountant at the U.S. Securities and Exchange Commission, said in a statement. "The SEC staff is committed to working with companies and their auditors to assure an effective transition as FASB's improvements are implemented."

The change could result in about $900 billion in assets being brought onto the balance sheets of the nation's 19 largest banks, according to federal regulators. The information was provided by Citigroup Inc., JPMorgan Chase & Co. and 17 other institutions during the government's recent "stress tests," which were designed to determine which banks would need more capital if the economy worsened.

In its quarterly regulatory filing earlier this month, Citigroup said the rule change could have "a significant impact" on its financial statements. Citigroup estimated it would result in the recognition of $165.8 billion in additional assets, including $90.5 billion in credit card loans.

JPMorgan estimated in its quarterly filing that the impact of consolidation of the bank's qualifying special purpose entities and variable interest entities could be up to $145 billion.