Grant Thornton has sent a letter to federal officials proposing that banking regulators adjust capitalization requirements to take into account the broader economic environment.
The accounting firm wants to avoid making further changes in U.S. GAAP such as those in FASBs recent revisions to fair value and mark-to-market accounting standards. While Grant Thornton said it supported the additional guidance issued by FASB in order to address certain misunderstandings and inconsistencies in GAAP, the firm also said that opportunities exist in the current regulatory framework to address the perception by some that GAAP needs further revision.
In its letter, addressed to Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke, and Federal Deposit Insurance Corp. Chair Sheila Bair, the firm suggested that banking regulators adopt an approach it calls dynamic regulatory capital provisioning, in which regulators adjust capital requirements to account for different economic environments.
Grant Thornton lists various advantages of such an approach: In prosperous economies, financial institutions often invest in increasingly risky assets in order to drive income and compete in the marketplace, said the letter. An increase in the overall capital requirements in such economies would serve as an effective braking mechanism by reducing the capital available for potentially excessive risk-taking. Further, the reduction in excessive risk-taking would redirect public investment in these institutions toward investors who look for long-term value creation, rather than short-term earnings. In struggling economies, the additional accumulated regulatory capital would provide the necessary cushion and time frame for institutions to absorb losses and hold or seek more orderly liquidation of assets. This process would, in turn, prevent dramatic declines in sales prices (and, thus, fair value) across other institutions.
The firm contends that GAAP would be separated more effectively from the regulatory capital requirements through such an approach, enabling investors to have the information they need while, at the same time, providing regulators with the tools they need for properly monitoring financial institution safety and soundness.
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