Accounting rules for banks eased as asset losses begin to be 'painful'
abs-cbnNEWS.com, Reuters | 10/24/2008 6:03 PM
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Banks are likely to reclassify some of their debt and equity holdings to reflect values ahead of the global financial crisis after the Bangko Sentral ng Pilipinas (BSP) eased mark-to market rules, bankers said on Friday.
But there won't be a scramble to shift all financial assets away from fair value accounting despite continued volatility in markets. Instead, banks are likely to reclassify their holdings selectively.
In the financial lingo, fair value or mark-to-market accounting refers to the methodology of assigning value to a financial asset based on how much it is worth if it is sold today. That value could be higher, or in this times of uncertainty--significantly lower--than how much it was when it was bought.
When asked if banks will make use of the central bank's easing of accounting rules, Victor Valdepenas, Unionbank president, said, "I think it is expected because asset prices do not reflect the true underlying values of these assets, especially those issued by the national government."
The Bangko Sentral ng Pilipinas (BSP) late on Thursday approved accounting guidelines allowing financial institutions to stop using mark-to-market accounting of their debt and equity holdings.
The value of these financial assets, which are reflected on the banks' financial records, determine how much money the banks will set aside as capital cover. The lower the value placed on these financial assets, the higher the capital money they set aside and could not lend out or re-invest. This method disciplines the banks not to make excessively risky investments in financial instruments.
The BSP said assets can now be based on the value at the time of acquisition, rather than their current market value used under mark-to-market rules. Assets acquired before July 1 are eligible for the reclassification although they have to be held until maturity.
Banks have until the end of the year, or Dec. 31, to reclassify assets.
"This mark-to-market system must be applied properly," Valdepenas said. "To have an outright application, particulary during the time when the market is not working doesn't make sense."
"It is just right to suspend it," he said.
The shift was made to align local accounting standards with the easing of fair-value rules in the United States and Europe.
"We are just recognizing that these are extraordinary times," Guinigundo told reporters, adding that the change in the value of these assets were due to extraordinary circumstances and not because they were inherently unsafe investments.
Global accounting standards were relaxed due to ballooning mark-to-market losses that have pressured banks globally to top up their basic capital amid tight money markets due to the worst financial crisis in decades.
But banks are unlikely to shift all of their assets under the new system.
"I think it will be done selectively, it's not an all or nothing package," said a fund manager from a foreign bank. "I doubt if they will do it for everything, otherwise the gains will be wiped out."
At present, Philippine banks' balance sheets are healthy enough to withstand heavy mark-to-market losses but the burden is beginning to be "painful," said Nestor Espenilla, a deputy governor of the central bank.
"This (move) recognises that prices today are very unstable and potentially not reflective of fundamentals," Espenilla said. "This would help stabilise the situation."
