NORWALK, Conn. – Credit union executives are calling on the Financial Accounting Standards Board to exempt credit unions from a proposed rule aimed at helping public investors, which would require a variety of new disclosures on interest rate and liquidity risk from financial institutions.
The FASB proposal is targeted at providing more transparency for investors, creditors, donors and other capital market participants, none of which applies to credit unions, according to a growing number of credit union critics of the rule. “As you are likely aware, the governance structure of credit unions prohibits investors, creditors, bondholders, donors and other types of capital market participants,” noted Kent Lugrand, president of InTouch CU in Texas, in a comment letter submitted to the FASB on the proposal.
In fact, note several credit union commenters, financial statements for credit unions are aimed at a limited audience; the regulators, the Federal Home Loan Banks, and to a much lesser extent, members, few, if any, who deposit their funds based on the financial condition of their credit union.
And in most cases, the regulators, for example, already have adequate information and access to information about interest rate and liquidity risk, the credit union executives point out.
“The proposed interest rate risk disclosures, if passed, would provide dangerous and misleading information about the safety and soundness of a financial institution, and therefore, the financial services industry,” wrote Edward Lis, vice president of finance at New York’s Fulton County FCU
The FASB proposal is a response to the 2008-2009 financial crisis, which many observers says was worsened by the lack of transparency in financial reporting.
The FASB was inserted in the middle of the financial crisis when financial institutions, particularly corporate credit unions, were required to book huge unrealized losses under the FASB’s market value accounting rules, exacerbating the crisis. The write-downs became so large, in many cases, that Congress forced the FASB to ease its market value accounting rules in the middle of the crisis.
At least one credit union executive said that more disclosures like the ones being contemplated by FASB would have exacerbated the panic. The FASB’s proposed disclosures, wrote Brad Miller, chief financial officer at North Carolina’s Coastal FCU, “would have likely left users of financial statements with a very inaccurate picture of the actual risks realized by institutions given changes in rates during 2008 and 2009.” Miller, who headed the Association of Corporate CU during the financial crisis, suggested the additional disclosures would have resulted in giving users of the financial statements a “false sense of security making the financial crisis worse.”
The onset of the FASB proposal comes as NCUA is expanding its own rules on interest rate and liquidity risk. A new agency rule, for example, requires all credit unions to develop a comprehensive interest rate risk policy. Another proposal would require credit unions to establish a federally-backed source of emergency liquidity.
The FASB proposal would require credit unions and other entities to provide a table showing their available liquid funds – cash, high-quality assets they could sell quickly, and available borrowing capacity – and discuss their exposure to liquidity risk, how it has changed and how they are managing it. Financial institutions would have to provide further information, such as a table of all their financial assets and liabilities broken down by maturity, including off-balance-sheet obligations.
Financial institutions also would have to disclose how changes in interest rates would affect profits and shareholders’ equity.
Credit unions would have to disclose the carrying amounts of classes of financial assets and liabilities segregated according to time intervals based on contractual repricing of the financial instruments and including the weighted-average contractual yield by class of financial instrument and time interval, as well as the duration of each class of financial instrument. They would have to disclose an interest rate sensitivity table on the effects on net income, and additional quantitative or narrative disclosures necessary for users of financial statements.