New accounting rules requiring banks to bring riskier off-balance sheet activities onto their balance sheets have resulted in significant reductions in the retained earnings of some of the largest US banks, according to a new Moody’s report.
Excerpts from Big Four U.S. Banks Apply New Accounting Rules to Consolidate $344 Billion of Assets (Premium)
First quarter filings by major U.S. banks disclosed, for the first time, details of the impact on January 1, 2010 of implementing new accounting rules for securitizations and other structures that traditionally have been held off-balance-sheet.
The filings indicate that a total of $344 billion of incremental assets were brought onto the “Big Four” banks’ -Citigroup (C), Bank of America (BAC), JPMorgan Chase (JPM) and Wells Fargo (WFC)) – Balance Sheets. Asset and liability accounts that were most significantly increased were loans, the allowance for loan losses, deferred taxes and debt.
Increases in the allowance for loan losses, in particular, drove significant reductions in the Retained Earnings of Citigroup (10.8%), Bank of America (8.6%) and JPMorgan Chase (7.0%); whereas Wells Fargo’s relative lack of newly-consolidated loans enabled it to record a small increase in Retained Earnings on its initial application of the new rules.
Notwithstanding these changes to U.S. GAAP equity, the reconsolidation of off-balance-sheet structures generally does not impact our view of capital adequacy. In rating banks under the previous accounting rules, we often made adjustments to reconsolidate off-balance-sheet activities or focused on metrics that looked at banks’ activities on a total managed assets basis.
The banks chose, largely, not to apply the permissible use of the fair value option when consolidating their previously off-balance-sheet activities; thus removing one potential area where peer comparability issues could have arisen. For example, a bank using this option to value its newly-consolidated loans would not have had to make any incremental change to its allowance for loan losses.
From a regulatory capital standpoint, among the Big Four, only JPMorgan Chase elected to utilize the permitted implementation delay to defer the full impact of the rule-changes on risk-weighted assets and risk-based capital requirements. However, once the deferral period is over, it expects the incremental impact of full implementation to be negligible.