Dynamic Provisioning – One Solution for Banking Crisis?

Regulators and Standard Setters have been working overtime to establish procedures and regulations to prevent a future meltdown based on recent lessons learned. One proposed solution from Spain? Dynamic Provisioning. Simplistically, the concept allows banks to build up capital buffers during prosperous times and then release during bad times. The concept originated in Spain in the year 2000. It is considered countercyclical, rather than procyclical, and requires a bank to set aside a provision for each new loan in case it goes bad. By countercyclical it means that Dynamic Provisioning smoothes the economic peaks and troughs. Thanks to Spain’s regulations, the country’s banks have been better able to weather the financial storm.

At a recent meeting in April of accounting standard setters in Johannesburg, the topic was discussed and the general consensus was that if Dynamic Provisioning was universally adopted, it shouldn’t flow through the profit and loss statement. Rather it should be part of a non-distributable capital reserve. It was agreed that more testing was needed.

Foreclosure Scams – OTS issues Warning to Consumers

The Office of Thrift Supervision (OTS) recently issued a warning to consumers to be on the lookout for various schemes aimed at troubled homeowners:

Three types of schemes are common:

§ Phantom help – The purported rescuer charges high fees for no work or for services that the homeowner could have easily handled or obtained free from legitimate organizations.
§ Bailout – A homeowner surrenders the title to the home after receiving a false promise that the he or she can remain as a renter and buy back the home later. The scam artist obtains possession of the home and most or all of its equity.

§ Bait and switch – Victims are told they can refinance their homes but instead sign documents transferring the titles to scam artists, while the victims remain responsible for making the mortgage payments.

Measurement of Fair Value of Liabilities - FAS157-f to the rescue!

In the latest proposed Staff Position, FSP FAS 157-f, the Financial Accounting Standards Board (FASB) is providing guidance around issues that have been raised concerning FAS 157. FAS 157 is entitled Fair Value Measurements and FAS 157-f in particular focuses on the measurement of liabilities. FAS 157 defines fair value as, “the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date”.

Concerns addressed by this FSP:

1. Transfers to counterparties and FAS 157's assumption that these are not considered settlement of the liability.

2. Non-performance risk being the same before and after transfer when in reality the new obligor may have different risk than the transferee.

3. Lack of observable market information for many liabilities.

4. Contractual restrictions preventing a transfer and its impact on measurement.

5. Liabilities traded in the marketplace as assets.

The comment period for the proposed FSP closes June 1, 2009.

Just Around the Corner – FASB Codification Becomes a Reality

On May 1st,2009, the Financial Accounting Standards Board (FASB) issued its first weekly alert leading up to the official rollout of the Codification of accounting standards. On July 1st, 2009, the FASB Codification will become the official and only level of authoritative GAAP (nongovernmental), other than guidance issued by the SEC. Accountants, me included, have long been frustrated by the myriad of standards to sift through from different sources, such as Statements (FAS), Interpretations (FIN), Emerging Issues Task Force (EITF) and other authoritative literature. As a consequence, it is sometimes difficult to determine if all guidance on a particular topic has been reviewed or how to interpret what may be conflicting instructions from different sources. Codification is not creating new GAAP, but rather organizing existing GAAP into a structure that streamlines the research process.

I encourage you visit the link below and register for access on the FASB website to explore the new structure. It is well laid out and very easy to navigate.

http://asc.fasb.org/home

I will be discussing this topic more as we approach July 1st. Please stay tuned!

Financial Crisis Advisory Group (FCAG) Expresses Concerns

Concern was expressed in an April 29th letter intended for distribution to the leaders of the G-20 nations from the Financial Crisis Advisory Group (FCAG) regarding priorities of and pressures put upon both the FASB (Financial Accounting Standards Board) and IASB (International Accounting Standards Board) as it relates to the current financial crisis. The FCAG was recently created by the FASB and IASB as a temporary advisory group composed of senior leaders with broad international experience in financial markets. The FCAG’s major goals are to explore the standard-setting implications of the global financial crisis as well as potential changes to the global regulatory environment.

In the April 29th letter, the FCAG expressed concern about the pressures being imposed by G-20 policymakers on both the IASB and FASB to make progress on a wide range of issues, some of which are very complex. The FCAG believes the boards should focus their resources on only the commitments already made so as to not delay the most critical projects. The FCAG suggested that high priority should be given to work on the financial instrument and consolidation / derecognition projects. Valuation and off-balance sheet standards, they say, particularly need improvement. This focus, they believe, will provide the more significant, lasting global improvements.

The FCAG praised the work and cooperation of the two boards on a multitude of projects.

Swine Flu - Is your Company Prepared for the Worst?

Is the Swine Flu (H1N1) scare media hype or a real disaster on the horizon? In this day of 24/7 news cycles and endless commentary about the elections or the economy, its easy to feel overwhelmed by yet another barrage of news, this time focused on the latest confirmed Swine flu case. It’s tempting to look at the low number of cases in the US as well as the severity and believe that the whole situation is overblown. As a business leader, you may feel the risk is too small to devote significant resources to preparation. I caution against this approach. History suggests that most pandemic flu outbreaks start in the spring with relatively mild symptoms. The flu then appears to disappear during the summer months. Unfortunately, history also shows that the virus has the potential to mutate into a deadlier strain and then stage a dramatic reappearance in the fall. With this in mind, as we head into the summer months, consider this an opportunity to establish and test Continuity of Business (COB) plans.

Factors to consider:

1. How will your business operate with significant staff disruption?
2. How many key operations can be conducted remotely?
3. Do you have communication plan to coordinate staff?
4. How will the business function if key vendors are unable to meet their obligations?
5. How will communications be maintained with customers?

I encourage readers to post their own thoughts and observations as to ways to best prepare for what may be an event of historic proportions later this year.

An excellent resource on the history of the 1918 Pandemic: Flu: The Story of the Great Influenza Pandemic of 1918 & the Search for the Virus That Caused It by Gina Kolata

Standard and Poor's Risk Adjusted Capital Framework Implemented

The purpose of Standard and Poor’s Risk Adjusted Capital Framework (RACF) is as a complimentary measure to Basel II. S&P stresses the term “complimentary” in that the RAC measure will not replace Basel II, but rather serve as a different perspective on the financial health of an institution. This evolutionary measure on the part of S&P is intended to be more globally consistent and less procyclical than Basel II, especially in light of the recent worldwide economic downturn. By “evolutionary” the S&P indicates that the concept of a complimentary measure is not new and that it has created such measures in addition to utilizing Basel I. The RAC ratio will be based on quantitative factors that are publically disclosed by individual institutions so as to maintain a high level of transparency regarding the process. S&P will consider qualitative factors in evaluating individual institutions, but these factors will not be part of the RAC calculation. S&P will strive to use Basel II asset classifications for purposes of consistency as well as minimize the amount of additional workload on institutions.