More than two-thirds of large U.S. institutional investors oppose a proposal by the Financial Accounting Standards Board (FASB) that would mandate fair value accounting treatment for most bank loans, according to a study released by Keefe, Bruyette & Woods (KBW) and Greenwich Associates.
According to the study, 66% of institutional investors say they are either strongly or very opposed to the proposal. Only one in five are in favor of the FASB's recommended changes. Despite the clear opposition, many of the institutional investors surveyed concede that current accounting standards are inadequate and need to be revised.
‘The FASB's mission is to provide useful information to investors, and the current proposal to expand fair value reporting on bank balance sheets is intended to improve the quality of information available to investors," says Thomas Michaud, KBW's president. "However, the results of this study demonstrate that a large majority of U.S. institutional investors think FASB is taking the wrong approach."
Institutions' primary objections to fair value accounting appear twofold. First, they believe mark-to-market valuations would not be helpful in making investment decisions, because fair market values for loans held on banks' books and other infrequently traded financial instruments would not be reliable. Second, they fear that variations in reported fair market values will magnify cyclicality in bank earnings and the economy as a whole, the study finds.
SOURCE: Keefe, Bruyette & Woods