Banks Oppose Proposed Accounting Change

Wells Fargo & Co. and J.P. Morgan Chase & Co. are opposing a proposed accounting change they say may cripple a segment of the $1.3-trillion U.S. loan market.

Both companies sent letters to the Financial Accounting Standards Board, the Norwalk, Conn.-based organization that sets U.S. accounting rules, objecting to a proposal to restrict loan “participations.”

Participations allow banks to move loans off their balance sheets by selling them to other institutions.

FASB is concerned that some participations aren’t actually sales because banks may retain an interest in the loans.

In its letter to FASB, San Francisco-based Wells Fargo, the fourth-largest U.S. bank, said participations help banks by spreading risk among many lenders.

J.P. Morgan, the second-biggest U.S. bank, listed 13 types of loans in which participations are used, including multibillion-dollar corporate loans and the pooling of credit card, auto and home loans into marketable securities.

The effect of the proposed change “would be far-reaching because numerous financial products use participations,” New York-based J.P. Morgan said in its letter. J. P. Morgan spokesman Michael Dorfsman declined to elaborate.

Banks have historically set aside about 1.25% of their loan portfolio for bad debts, said Dennis Hild, a vice president at America’s Community Bankers, a trade group representing 1,000 community banks. Including participations in the total amount of loans held by a bank would have a significant effect on the bank’s capital resources, he said.

FASB project manager Patricia Donoghue said the group wanted to make sure banks properly account for loans in which they retain an interest.

“Some, but not all, loan participations do not meet the current standard for sale accounting but are being accounted for as sales, incorrectly,” Donoghue wrote.