Remarks
By
Donald E. Powell Chairman,
Federal Deposit Insurance Corporation
Before the
America's Community Bankers Annual Convention
Washington, D.C.
FOR IMMEDIATE RELEASE Media Contact:
PR-109-2004 (10-18-2004) David Barr (202) 898-6992
David Barr (202) 898-6992
My main subject this morning is accounting and governance—what the changes in
these areas mean for you, and what they mean for the bank regulators. Also, on a
related subject, what the changing dynamic should mean for the housing GSEs.
You all are acutely aware that the legacy of Enron and other high-profile bankruptcies
are still with us. Part of the response to those scandals reflected a need to strengthen
financial reporting and internal controls in this country.
There were some top managers in corporate America who misused their positions,
manipulating the financial reporting system in their own favor and at the expense of
investors. Their accountants, attorneys and, in some cases, bankers allowed this to
happen.
All of those involved in these scandals did our country a disservice. As Professor Rajan
of the University of Chicago puts it in his recent book, sometimes capitalists are the
worst enemies of capitalism.
While Enron's legacy has been, in part, a needed housecleaning, it reflects another
characteristic of our society—a desire to identify villains and a fondness for sweeping
legislative reforms when public indignation reaches a critical mass. Such reforms can
affect the lives of the innocent, as well as the guilty, in unanticipated and unintended
ways. This is not good for America.
In Sarbanes-Oxley and in a number of accounting pronouncements over the last few
years, we have seen an understandable correction to the excesses of earlier years.
Many of you are living with the effects of that correction. While most of you have no
intention of defrauding investors or deceiving your regulators, many of you have
expressed concerns as to whether the costs you are incurring are generating any real
benefit.
By
Donald E. Powell Chairman,
Federal Deposit Insurance Corporation
Before the
America's Community Bankers Annual Convention
Washington, D.C.
FOR IMMEDIATE RELEASE Media Contact:
PR-109-2004 (10-18-2004) David Barr (202) 898-6992
David Barr (202) 898-6992
My main subject this morning is accounting and governance—what the changes in
these areas mean for you, and what they mean for the bank regulators. Also, on a
related subject, what the changing dynamic should mean for the housing GSEs.
You all are acutely aware that the legacy of Enron and other high-profile bankruptcies
are still with us. Part of the response to those scandals reflected a need to strengthen
financial reporting and internal controls in this country.
There were some top managers in corporate America who misused their positions,
manipulating the financial reporting system in their own favor and at the expense of
investors. Their accountants, attorneys and, in some cases, bankers allowed this to
happen.
All of those involved in these scandals did our country a disservice. As Professor Rajan
of the University of Chicago puts it in his recent book, sometimes capitalists are the
worst enemies of capitalism.
While Enron's legacy has been, in part, a needed housecleaning, it reflects another
characteristic of our society—a desire to identify villains and a fondness for sweeping
legislative reforms when public indignation reaches a critical mass. Such reforms can
affect the lives of the innocent, as well as the guilty, in unanticipated and unintended
ways. This is not good for America.
In Sarbanes-Oxley and in a number of accounting pronouncements over the last few
years, we have seen an understandable correction to the excesses of earlier years.
Many of you are living with the effects of that correction. While most of you have no
intention of defrauding investors or deceiving your regulators, many of you have
expressed concerns as to whether the costs you are incurring are generating any real
benefit.
Bank regulators tend to work case by case, taking corrective action against those who
need it, and letting the rest go about their business. As such, it should not surprise you
to know that regulators have been doing, and continue to do, all we can to ensure that
reforms are applied in a commonsense manner, with full and appropriate deliberation to
all costs and benefits.
We have worked very closely with FASB, the SEC, and the AICPA over the last few
years on a number of issues of interest to you. The bank regulators maintain an ongoing
dialogue with these organizations and those conversations have been productive. They
have, I believe, resulted in an appropriate balance of legitimate objectives. The FASB,
in particular, must consider the needs of investors and the general public, along with the
business realities of all issuers of financial statements, not just banks. Bank regulators
have interests in bank safety-and-soundness that transcend accounting issues.
I applaud the accounting standard-setters for the seriousness with which they have
considered all points of view, and their willingness to take the time for full and
appropriate deliberation on several issues of vital importance to bankers and bank
regulators.
Last year's proposal on accounting for loan losses is one example. The bank regulators
expressed concerns over the proposed guidance in our comment letter, as did many
others. After carefully reviewing the comment letters, the AICPA decided to proceed
only with guidance to improve disclosures, which was consistent with the regulators'
recommendation.
Early this year, the FASB began to question whether the existence of a right of setoff
should prevent a loan participation from being accounted for as a sale. This is a
complex issue and I applaud FASB for drawing on the best technical expertise before
making a decision. The FASB's recent tentative decisions on setoff will preserve sale
accounting for loan participations, while at the same time identifying best practices for
participation agreements.
At the end of September, the FASB delayed the effective date of guidance issued
earlier this year on other-than-temporary impairment of investment securities. This step
was necessary after banks and bank regulators learned that accounting firms planned
to take a restrictive view of how this guidance should be applied to available-for-sale
securities whose values had declined due to increases in interest rates.
We shared our concerns about this development in the context of how banks manage
their available-for-sale portfolios. The FASB responded promptly, and we would
encourage you to review and comment on the proposal they have issued before the
comment deadline at the end of this month.
On a side note, there is an unresolved issue with the SEC that does not pertain to
accounting, about which bank regulators have great concern. The recent “broker push-
out” proposals by the SEC would, we believe, cause substantial dislocations to long-
need it, and letting the rest go about their business. As such, it should not surprise you
to know that regulators have been doing, and continue to do, all we can to ensure that
reforms are applied in a commonsense manner, with full and appropriate deliberation to
all costs and benefits.
We have worked very closely with FASB, the SEC, and the AICPA over the last few
years on a number of issues of interest to you. The bank regulators maintain an ongoing
dialogue with these organizations and those conversations have been productive. They
have, I believe, resulted in an appropriate balance of legitimate objectives. The FASB,
in particular, must consider the needs of investors and the general public, along with the
business realities of all issuers of financial statements, not just banks. Bank regulators
have interests in bank safety-and-soundness that transcend accounting issues.
I applaud the accounting standard-setters for the seriousness with which they have
considered all points of view, and their willingness to take the time for full and
appropriate deliberation on several issues of vital importance to bankers and bank
regulators.
Last year's proposal on accounting for loan losses is one example. The bank regulators
expressed concerns over the proposed guidance in our comment letter, as did many
others. After carefully reviewing the comment letters, the AICPA decided to proceed
only with guidance to improve disclosures, which was consistent with the regulators'
recommendation.
Early this year, the FASB began to question whether the existence of a right of setoff
should prevent a loan participation from being accounted for as a sale. This is a
complex issue and I applaud FASB for drawing on the best technical expertise before
making a decision. The FASB's recent tentative decisions on setoff will preserve sale
accounting for loan participations, while at the same time identifying best practices for
participation agreements.
At the end of September, the FASB delayed the effective date of guidance issued
earlier this year on other-than-temporary impairment of investment securities. This step
was necessary after banks and bank regulators learned that accounting firms planned
to take a restrictive view of how this guidance should be applied to available-for-sale
securities whose values had declined due to increases in interest rates.
We shared our concerns about this development in the context of how banks manage
their available-for-sale portfolios. The FASB responded promptly, and we would
encourage you to review and comment on the proposal they have issued before the
comment deadline at the end of this month.
On a side note, there is an unresolved issue with the SEC that does not pertain to
accounting, about which bank regulators have great concern. The recent “broker push-
out” proposals by the SEC would, we believe, cause substantial dislocations to long-