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May 18, 2009

Grant Thornton US offers fair value solution

(FREE) The solution to the fair value
debate lies in changing the way regulatory capital requirements are
established, rather than changing accounting standards, Grant
Thornton US has told banking regulators.

Grant Thornton made this proposal to the US
Treasury, the Federal Reserve System Governors and the Federal
Deposit Insurance Corporation in a letter intended to expound on a
proposal that has been talked about in some accounting circles.

The core of the message is that regulators
already have the ability to require banks to increase the amount of
capital they hold without changing the financial statements, Grant
Thornton managing partner of public policy and corporate governance
Trent Gazzaway said.

If they did this in line with Grant Thornton’s
proposal, it would increase regulatory capital requirements in
booming economies, which would serve as a braking mechanism for
banks, preventing them from investing in riskier assets by removing
the available capital.

This capital would be held as a reserve that
would be available in a market downturn for banks to use to
maintain normal lending operations.

Gazzaway suggested the increased capital
requirements would also attract investors looking for long-term
value and safety.

“Those are the kind of investors we want in
financial institutions that have systemic risk because they don’t
put the same pressure on management for short term earnings,” he
explained.

Gazzaway said there is a lot of pressure on
the Financial Accounting Standards Board to make changes to
accounting so the effects will flow through to regulatory
capital.

“We are saying that doesn’t have to be the
case,” he said. “The minute we start making changes to accounting
standards, we are impacting the clarity of the information to
investors.

“Right now the ability exists for the
regulators to make changes on their side without impacting
accounting. They should exercise that ability and what that will do
is take the pressure off the accounting standard setters to make
changes that aren’t necessary for operational purposes.

“We are not trying to insert some regulatory
or legal separation between accounting standards and regulatory
standards, we are just trying to highlight the separation that
already exists and is available now. We can capitalise on that and
get to that win-win situation where both the investors have the
information they need and the regulators have the tools and the
ability to protect the safety and soundness that they need.”

Gazzaway said the crux of the issue is the
question ‘is US GAAP having a negative impact on regulatory
capital?’

“I would say that in large part, ‘no’,”
Gazzaway said.

He explained that the mark-to-market of most
assets that are subject to fair value does not impact regulatory
capital.

Most assets in the US are held in the category
‘available for sale’. These are classified as trading assets and
that mark does not impact regulatory capital, he said.

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