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ICBA: Fair Value Accounting Unfair for Community Banks

Washington, D.C. (Nov. 14, 2008)—The Independent Community Bankers of America (ICBA) told the Securities and Exchange Commission (SEC) that full mark-to-market, or fair value, accounting is inappropriate for community bank financial statements and current standards have exacerbated the current financial crisis. In a letter commenting on an SEC study required by the Emergency Economic Stabilization Act of 2008, ICBA told the agency that more implementation guidance is need to foster better understanding and consistent application of accounting standards.

“ICBA urges the SEC to recognize that community banks fund their operations by taking deposits and holding loans in their communities, which are not readily marketable, not by creating or purchasing assets or liabilities for quick resale,” said Ann M. Grochala, ICBA vice president for lending and accounting policy. “Rather than reflect the reality of community banking, mark-to-market accounting standards are more likely to mislead regulators, investors and others examining community bank financial statements.”

ICBA said that accounting measures should more closely reflect the way financial instruments generate earnings and cash flows, regardless of whether active markets for the instruments typically exist. Community bankers have strong concerns about the role fair value accounting has played in exacerbating the recent financial crisis as financial instruments are priced not at “fair value” but at forced liquidation values, despite current guidance.

ICBA also urged the SEC and the Financial Accounting Standards Board to work with banking regulators to review current loan loss allowance guidance to determine if it is truly appropriate for the long-term economic health. Current standards provide little ability for financial institutions to set aside reserves in good times to prepare for bad times due to concerns about the management of earnings.

View the comment letter at www.icba.org.