Key Takeaways

  • The Financial Accounting Standards Board (FASB) unanimously decided on Wednesday (Jan. 15) during a webcast regular board meeting not to add a project that could require banks to disclose more information about credit risk transfer (CRT) transactions to its priority technical agenda. The decision means the board will not proceed with updates to the codification underpinning Generally Accepted Accounting Principles (GAAP) to specifically address the accounting treatment of CRTs.
  • The decision followed a staff recommendation against the project. In their presentation, staff noted that existing accounting guidance already covers specific credit instruments such as credit default swaps and purchased guarantees, while the U.S. Securities and Exchange Commission's (SEC) Regulation K also requires disclosure of certain related information.
  • As board members explained their votes against the disclosure project, some expressed the view that the issue did not meet the standard of "pervasiveness" required for a new project. However, several members raised the need for the board to consider addressing risk disclosure issues in a broader manner in the future.

In-Depth Analysis

The vote came approximately six months after the FASB received a request to add the issue to its agenda. The request came from Jill Cetina, Executive Professor of Finance and Associate Director of the Commercial Banking Program at Texas A&M University in College Station, Texas.

In a July 29 letter to FASB Technical Director Jackson Day, Cetina argued that U.S. GAAP and regulatory reporting need to better reflect CRT transactions. She noted that under Basel III, banks are permitted to use CRTs to reduce risk-weighted assets, thereby lowering the denominator of their regulatory capital ratios, but bank regulators do not require U.S. banks to report such transactions in quarterly regulatory filings.

In her letter, Cetina wrote: "Bank investors should be able to discern sufficient information about CRT usage from a bank's U.S. GAAP financial statements to make investment judgments about the strength of U.S. banks' capital, independent of bank regulators. Therefore, adequate disclosure of risk-based capital regulatory ratios when they are incorporated into U.S. GAAP financial statements is critical to the confidence of bank investors."

During the meeting, board members acknowledged the need to address risk disclosure at a broader level, noting that relevant information is often "scattered" across various reports. Additionally, several members noted that ongoing projects aimed at reviewing the FASB's broader agenda should consider such initiatives.

"We need better overall disclosure," board member Fred Cannon said during the meeting. Although a significant amount of information is already provided on certain risks, he said, "it is extremely difficult, if not impossible, to piece together the full picture to understand a company's condition."