FASB declines to tackle new credit risk transfer project

FASB has decided against adding a new project to its priority “technical” agenda that would have considered requiring banks to disclose more information about credit risk transfer transactions. In a unanimous decision made during a live-streamed regular board meeting, members voted not to move ahead with pursuing an update to the codification which underpins generally accepted accounting principles related to accounting for CRTs. 

The move came after staff advised against the project, in a presentation that in part noted that accounting guidance already exists for certain credit instruments such as credit default swaps and purchase guarantees, while SEC’s Securities Regulation K already requires certain related information to be disclosed. 

As members explained their votes against pursuing the disclosure project, it was noted that the issue did not meet the criteria for a new project of there being a sufficiently “pervasive” need for the change. However, several members suggested it brought up the need for the board to potentially consider addressing a broader approach to how risk is disclosed.  

The vote comes roughly six months after FASB received a request to add the topic to its agenda from Jill Cetina, executive professor of finance and associate director of the commercial banking program at Texas A&M University in College Station, Texas.  

In a July 29 letter to FASB technical director Jackson Day, Cetina asserted that there was a need for better U.S. GAAP and regulatory reporting on CRTs, noting that banks under Basel III are allowed to use CRTs to shrink their risk-weighted assets in order to reduce the denominator of their regulatory capitalization ratios, but that bank regulators do not require reporting of such transactions in U.S. bank’s regulatory quarterly filings.  

During the meeting, the members acknowledged that there is a need to address risk on a broader basis, noting that information is often “scattered” through reports. In addition, several noted that the ongoing project to review the FASB’s broader agenda would do well to consider such an initiative.