NEW YORK--(BUSINESS WIRE)--US accounting standard changes for "repo-to-maturity" (RTM) transactions better reflect bank leverage by bringing them on-balance-sheet, Fitch Ratings says. The new treatment is in line with the supplementary leverage ratio rule for the largest US banks.
The revision eliminates the loophole to account for RTMs as sales. It is the latest fix from the Financial Accounting Standards Board to the financial asset transfer rules since the financial crisis and aims to reduce the amount of repos held off-balance sheet. Previously, RTMs were considered sales instead of secured borrowings under US GAAP because the maturity of the underlying asset financed matches the maturity on the financing provided.
The update better aligns the US GAAP treatment with IFRS. More importantly, the RTM transferor retains credit and market risk and is still exposed to funding risk on margin calls, therefore, bringing the repo back on-balance sheet reduces the risk that bank leverage is understated.
Additional disclosures required for repo-like transactions that get off-balance-sheet treatment should also reduce this risk, by making it easier to adjust for these exposures in financial analysis. However, extra information on the fair value of financial assets transferred and the weighted-average contractual duration for each class of collateral pledged, once mooted by the standard setters, will not be included.
Nevertheless, the changes bring the treatment of RTM in line with how the supplementary leverage ratio will be calculated. The rule finalized in April will require the eight US globally systemically important banks to maintain a 5% leverage ratio at the holding company level and a 6% requirement at banking subsidiaries. US regulators have proposed aligning the denominator of the supplementary leverage ratio (total leverage exposure) to the recently adopted Basel III definition. This means that banks must reverse all sales-related accounting repos and calculate its exposure as if the repo had been treated as a financing transaction and kept on-balance sheet.
For further details on the new accounting standard, see "FASB Closes Repo-to-Maturity Loophole" published today on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research: FASB Closes Repo-to-Maturity Loophole (New Standard Requires Repos-to-Maturity to be Treated as Secured Borrowings)