Thursday, October 2, 2008

Capital Sleight of Hand?

With all the hoopla over the last several weeks, some investors may have missed a little discussed press release issued by the Federal Reserve on September 15, 2008, which may have an impact on the current financial crisis that is convulsing the markets.

“The Federal Reserve Board on Monday requested public comment on an interagency notice of proposed rulemaking (NPR) that would permit a banking organization to reduce the amount of its goodwill deduction from tier 1 capital by any associated deferred tax liability.”

Tier 1 capital, of course, is extremely important in the financial world today, and a cushion here can mean the difference between life and death for a bank.

“Under the proposed rule, the regulatory capital deduction for goodwill would be equal to the maximum capital reduction that could occur as a result of a complete write-off of the goodwill, which is equal to the amount of goodwill reported on the balance sheet under generally accepted accounting principles (GAAP) less any associated deferred tax liability.”

The impact will vary for each bank based on the amount of goodwill and associated deferred tax liability, but according to FIG Partners, it will increase tier 1 and total risk based capital by 30 basis points for some banks.

I suppose the banking industry needs whatever capital it can get, but I wonder if accounting “sleight of hand” is what got us into this mess into the first place.

This article was written by the Stock Market Prognosticator. If you enjoyed this article, please vote for it by clicking the Buzz Up! button below.

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