Bloomberg News

Reed Says Banks Shielding Assets Put Financial Markets at Risk

September 18, 2008

U.S. Senator Jack Reed, chairman of a Senate Banking Committee panel on securities, said banks keeping assets such as mortgages and credit-card receivables off their balance sheets are adding risk to the market.

Large U.S. financial institutions joined in a ``significant build-up of off-balance-sheet exposures,'' Reed, a Democrat from Rhode Island, said at a hearing in Washington today. ``These exposures not only weakened them, but indeed placed significant risks on the entire financial system, contributing to the severity of the current crisis.''

The U.S. Financial Accounting Standards Board is proposing amendments to its rules that would force banks to list many off- balance-sheet assets on their books, a change opposed by the securities industry. The proposal, aimed at giving investors more information about company assets, would take effect for fiscal years beginning after Nov. 15, 2009.

The Securities and Exchange Commission staff ``strongly believes that the proposed amendments hold promise in enhancing financial reporting transparency,'' John White, SEC director of corporation finance, and James Kroeker, the agency's deputy chief accountant, said in prepared testimony.

The FASB board in July delayed the changes by a year after investors said the proposals were too confusing and financial institutions complained they lacked time to implement them. The world's largest banks and brokerages have reported more than $518 billion in writedowns and credit losses since the start of 2007, some stemming from their off-balance-sheet assets.

FASB would ``require public entities to provide additional disclosures about transfers of financial assets,'' the Norwalk, Connecticut-based board, which sets U.S. accounting standards, said in a statement Sept. 15. So-called qualified special purpose entities, used by banks to repackage loan pools into mortgage-backed securities, would be eliminated.

To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net.

To contact the editor responsible for this story: Otis Bilodeau at obilodeau@bloomberg.net.


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