Some 43% large U.S institutional investors would reduce or significantly reduce their investments in U.S. banks if a FASB proposal requiring mark-to-market accounting for bank loans is approved, according to a Greenwich Associates and Keefe Bruyette & Woods survey.
Ten percent said they would increase their level of bank-sector investing if the proposal by the Financial Accounting Standards Board is approved.
Overall, 66% of responding institutional investors opposed the FASB proposal, which would apply to most bank loans and require banks to report market value alongside current cost accounting valuations. Some 20% of respondents favor it.
“Institutional investors believe mark-to-market accounting would not be helpful in making investment decisions because fair-market values for loans and other infrequently traded financial instruments would not be reliable — particularly in difficult market conditions,” according to a four-page report on the survey results. They “distrust estimates of fair value,” contending the process of determining fair-market value “would have to include countless variables,” the report said.
In addition, institutional investors object out of concern that reporting fair-market value “will magnify cyclicality in bank earnings and the economy as a whole,” the report said.
“The fact that U.S. institutional investors overwhelmingly oppose the fair-value proposals should give FASB board members cause to rethink their approach,” Don Raftery, Greenwich Associates consultant, said in a statement about the survey.
As an alternative to the FASB proposal, 70% of responding institutional investors would favor greater transparency, requiring banks to include enhanced disclosures about market valuation in 10-Q and 10-K reports but not on the balance sheet, the report said.
Greenwich surveyed portfolio managers or analysts covering financial stocks at 62 institutional investment organizations Sept. 8-20. In total, the institutions have more than $1 trillion in assets under management.
The comment period on the FASB proposal — Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities — ended Sept. 30. But FASB is concluding Tuesday the second day of a two-day roundtable on the proposal at its Norwalk, Conn., office. FASB doesn’t expect to vote on the proposal until at least the second quarter of next year.