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Banks fear new $5,000bn balance burden

By Paul J Davies and Gillian Tett in Cannes and Jennifer Hughes in London

Published: June 3 2008 23:29 | Last updated: June 3 2008 23:29

Accounting changes could force US banks to take thousands of billions of dollars back on to their balance sheets in the coming months in a move that is likely to curb further their lending and could push them into new capital raisings, analysts have warned.

Analysts at Citigroup said a planned tightening of the rules regarding off-balance sheet vehicles would force banks to reconsider arrangements and could result in up to $5,000bn of assets coming back on to the books.

The off-balance sheet vehicles have been used by financial institutions to keep some assets off their balance sheets, thereby avoiding the need to hold regulatory capital against them.

Birgit Specht, head of securitisation analysis at Citigroup, said: “We think it is very likely that these vehicles will come back on balance sheet.

“This will not affect liquidity because [they] are funded, but it will affect debt-to-equity ratios [at banks] and so significantly impact banks’ ability to lend.”

Ms Specht told a seminar at a conference on asset-backed securities in Cannes that the uncertainty about what might change was making banks uneasy about their investments. “Banks are not investing [in assets] right now because of funding issues and regulatory uncertainty.”

The comments come as regulators and central bankers are intensifying behind-the-scenes discussions about the shape of the financial architecture in response to the credit turmoil.

A key component of these global talks – which are likely to come to a head in the next couple of months – will be the accounting regime for off-balance sheet vehicles, with some senior regulators pressing for a global initiative to bring these vehicles back on to the balance sheet, not just in the US but in Europe as well.

Both international and US accounting bodies are working on rule changes; the US standard-setter, the Financial Accounting Standards Board, is to decide on Wednesday. US rulemakers have come under domestic pressure from regulators and policymakers who felt the rules allowed banks to hide too much of their exposure to subprime assets.

Although many leading banks have strengthened their capital, these steps have been focused on repairing the damage wreaked by credit losses – rather than offsetting any impact of new assets rolling back on balance sheets.