Mr. Chairman and Members of the Subcommittee, I am Bill Roberts, Senior Vice President and Controller of First Chicago NBD Corporation. As a former Chairman of the Accounting Committee of the American Bankers Association (ABA), I am pleased to appear before you today to present the views of the ABA and the ABA Securities Association (ABASA) on the recently proposed rule of the Financial Accounting Standards Board (FASB) on accounting for derivatives and hedging activities (proposal).
The ABA brings together all elements of the banking community to best represent the interests of this rapidly changing industry. Its membership -- which includes community, regional, and money center banks and holding companies, as well as savings associations, trust companies, and savings banks -- makes ABA the largest banking trade association in the country. ABASA is a separately chartered trade association of the ABA that was formed in 1995 to develop policy and provide representation for banks underwriting and dealing in securities, proprietary mutual funds, and derivatives.
Let me say at the outset that I have long been a strong supporter of private sector accounting standards. I am a Certified Public Accountant, a member of the American Institute of Certified Public Accountants (AICPA), and a former partner with one of the Big Eight (soon to be Big Five) accounting firms. Hopefully, I am viewed by the banking industry and by the FASB as being a person who is known for working within the process. As a member of the ABA's Accounting Committee, as a two term Chairman of that esteemed group, as the ABA's witness in the FASB public hearings on this proposal, and as a member of the FASB's Financial Accounting Standards Advisory Committee, I have watched this proposal go through several metamorphoses, twists, and turns, and it has turned out to be a very ugly duckling. My industry's success in achieving a standard that is workable is the same as my Chicago Bears' success - 0 and 6.
The ABA was extremely uncomfortable in joining others in requesting this hearing. The ABA has rarely, if ever, requested Congressional hearings on an accounting rule. Even during recent periods of strong disagreement between the banking industry and the FASB -- and we have had some very significant disagreements with the FASB -- we have not opted to seek hearings. In this case, we believe that the FASB is making a wrong turn -- a turn that will only intensify with the FASB's next project on fair value accounting for financial instruments. Since the FASB is persistent in its quest for fair value accounting on a piecemeal basis -- without sufficient study -- we believe that a fair hearing on this proposal is essential.
We have been and continue to be supportive of private sector accounting standard setting.
In asking for hearings, we are not requesting that Congress write this accounting standard nor are
we suggesting that the U.S. government take over any responsibilities that are currently with the
FASB. However, we are frustrated:
We believe that the FASB has listened to, but not heard, our fundamental concerns. We appreciate your hearing our concerns.
The SEC has Congressional authority to write accounting standards for publicly held companies; however, they have historically allowed the FASB to develop generally accepted accounting principles (GAAP). A few years ago, there was some Congressional pressure on the SEC to develop accounting standards that would more clearly reflect derivatives activities. The SEC has focused on derivatives over the past few years, and accounting practices have become more generally accepted and understood during that time. Registrants, working jointly with the SEC (and FASB) have greatly improved market risk and derivatives disclosures. The market is still digesting these developments, and there is no longer a clear call for the FASB to quickly mandate a significant change in the accounting model. Because of the SEC's oversight role with the FASB, it would be very useful for the SEC to support giving the FASB sufficient time to evaluate the concerns raised in this and other statements and encourage the FASB to make any fundamental changes that may be necessary.
We acknowledge that tackling the accounting issues surrounding derivatives and hedging activities is an extremely difficult task and that the FASB has faced many tough decisions. We also acknowledge that the FASB has made changes to the document that have improved it for our industry and others. However, the banking industry's most fundamental concerns have not yet been addressed, and the clock is ticking. Only 1 full business day remains in which to provide comments to the FASB.
The ABA has been very involved with the FASB's process on this issue, but we believe that the quality of the process for this project has been inadequate. The ABA and the FASB have worked closely together over the past ten years on this issue and others. We have attended almost all of the public Board meetings on derivatives. We have held joint public meetings with the Board of the FASB. We have held conference calls with FASB staff and individual Board members. We have written comment letters. I, along with two other representatives of the ABA, testified at the FASB hearings. We still have not been heard.
The ABA and others, including Federal Reserve Chairman Alan Greenspan (July 31, 1997 letter to FASB Chairman Ed Jenkins), have raised concerns about the proposal and have provided the FASB with views about implementation issues and alternative proposals and recommendations to improve the quality of the standards. However, the recommendations have been rejected. In part, the FASB's response to Chairman Greenspan's letter was that "most of your observations and suggestions are similar to those you made earlier in our process and were considered carefully at that time" (August 11, 1997 letter from FASB Chairman Ed Jenkins to Federal Reserve Chairman Alan Greenspan).
Mr. Chairman, as you may know, it is rare that chief executive officers, particularly from different industries, can agree on any given issue. However, there is unanimous agreement among 35 CEOs of major corporations that (1) the FASB does not have the right answer, (2) that the proposal needs significant changes, and (3) that it should be re-exposed for public comment. The FASB's response, in part, was "you state that over the last few weeks the Board has developed a new proposal on accounting for derivatives and hedging and has not exposed it for public comment. You also state that the Board has not adequately considered the proposal's impact on capital markets or the difficulties that companies will have in implementing the proposal. These assertions are incorrect." (Emphasis added. FASB August 1, 1997 letter to CEOs.) We believe that if this many CEOs are incorrect, despite their unanimous agreement, then the process is deeply flawed.
One might argue that the CEOs are acting in their self interest; yet, the FASB is also unwilling to listen to the Federal Reserve Board and the Comptroller of the Currency. By not re- exposing the proposal and by not reacting to the fundamental concerns of these industries and regulators, we can only conclude that the process is inadequate.
Granted, the process has been extensive, but significant technical and operational concerns remain about whether this is an improvement over current accounting practice. These concerns warrant full re-exposure and full reconsideration of the proposal. To exemplify the wide gap between the perception and reality of FASB's process, one can look at their highly publicized 45 day comment period for their "mini exposure" of the latest proposal. Unfortunately, the FASB is only permitting this mini exposure rather than a full re-exposure, providing only portions of the proposal for comment and asking for comments only on "clarity and operationality" and other "new" arguments. This is a very different request from a typical exposure draft. It discourages commenters from revisiting critical issues and sends the message that even if those issues continue to be of concern, they will not be reconsidered by the FASB. As a matter of fact, there is no required "due process" with this mini exposure, and they are not required to address any comments received.
The SEC Chairman has written that " the Commission will be interested to see what newissues, if any, are raised by commenters." (Emphasis added. October 1, 1997 testimony before the House Subcommittee on Capital Markets, Securities and Government Sponsored Enterprises). A FASB Board member was quoted as saying that the Board "will stand firm and go ahead" and is "on track to issue a final statement by year-end" on accounting for derivatives. He said that there is "unanimity among the FASB and the Securities and Exchange Commission that derivatives should be carried on the balance sheets as assets and liabilities and marked to market." (Emphasis added.) He also said that the final version of the new accounting rules would "substantially" be as they appear in the most recent draft, posted earlier this month on FASB's web site (Dow International 09/19/97). The FASB and its overseer, the SEC, having apparently concluded that enough time has been spent on this issue, seem to be simply going through the motions of due process, with only a wink at the quality of it.
The FASB defends its process by using impressive quantitative information, and we do not disagree with their statistics. However, those statistics do not mean that the process produced a quality product:
During the House hearings on this issue (October 1, 1997), the FASB Chairman indicated that the FASB had addressed many of the concerns of financial institutions. However, the FASB's characterization of the significant issues and the resolution of those issues is very different from the way that banks would characterize them. A copy of the ABA's news release, which responds to the FASB's analysis, is attached to this written testimony. We believe that our most fundamental issues whether fair value should be used, whether it can be implemented, and whether it is practical were ignored by the FASB.
The history with FASB's rulemaking process exemplifies why a cautious approach is necessary. The best example is the FASB's proposal on accounting for income taxes. The FASB worked on that proposal for approximately ten years, and the banking industry and others attempted to educate the FASB on the problems prior to its issuance as a final rule. Despite the problems with the proposal, the FASB insisted on moving ahead with the final rule, which became Statement of Financial Accounting Standards No. 96 (SFAS 96). There were so many problems with the rule that, even though it was a final standard, it was never implemented. Unfortunately, some companies did implement SFAS 96, which required significant systems changes. The FASB officially delayed the effective date of SFAS 96 twice, and then reconstructed the rule along the lines that industry had intially recommended. It was re-issued as an exposure draft for public comment and was finalized as SFAS 109, which is in use today. We heard many of the same words in defense of the FASB process on that issue as we are hearing today. It would truly be a shame for the marketplace to adapt to this FASB proposal only to find out that the FASB has made another mistake and must revise its rule.
Other examples of failures in the process include:
The ABA has been active for many years with the FASB to help improve its proposal on accounting for derivatives and hedging. We agree with the FASB's goal of making derivatives and hedging activities transparent to investors and creditors and creating one consistent accounting model. The FASB, SEC, and Congress should be concerned that this proposal will not achieve that goal.
The ABA has serious concerns about the impact of the FASB's latest proposal to change the accounting for derivatives and hedging. Simply stated, the accounting would be misleading to the public. The ABA believes that a better alternative to the proposal would be to resolve inconsistencies and address areas not covered in current accounting standards based on current accounting practices. Current accounting practices more faithfully represent the economic effect of hedging activities.
The FASB proposal fails to improve upon existing standards because the accounting results would be incomplete, inconsistent, complex, and misleading. The accounting results would be incomplete because certain prudent hedging strategies would not qualify for hedge accounting. There would be inconsistent accounting results for hedges of fair value risk versus hedges of cash flow risk, even though the economic impact is substantially the same. In addition, a net investment in a foreign operation could qualify for hedge accounting, but a hedge of a single interest rate exposure the net of a portfolio of assets or liabilities definitely would not qualify. The proposal also creates operational complexities and burdens that do not improve the quality of financial information or risk management activities. Finally, the accounting results would be misleading because the income from derivatives and hedged items would not be integrated in a manner that shows the net economic effect of hedging strategies.
In Federal Reserve Chairman Greenspan's letter to the FASB, he recommended that the proposal be re-offered for formal public comment and that the "FASB should carefully consider an alternative approach." Chairman Greenspan's alternative approach would "be a constructive approach that could increase transparency of financial information, promote enhanced risk management, and potentially lead to greater international harmonization of accounting standards." He states that "major market participants may be more willing to support this alternative approach if they do not have to incur the significant systems cost associated with the FASB's planned derivatives standard." Chairman Greenspan further stated that the FASB proposal "continues to take a piecemeal approach to fair value accounting which raises a number of concerns. For example, the treatment of cash flow hedges will report an increase in the volatility of comprehensive income and stockholders' equity where no comparable increase in risk has occurred. Institutions using derivatives as hedges would have to make significant systems changes to identify and report the fair value information required by the FASB approach while those with unhedged cash positions would not. Thus, the proposal may discourage prudent risk management activities and in some cases could present misleading financial information."
The Comptroller of the Currency, Eugene Ludwig, wrote to Representative Richard H. Baker on September 30, 1997. The Comptroller wrote that "we are concerned that the proposal may discourage banks from efficiently using derivatives in risk management strategies. For example, it may be difficult to obtain accounting results that reflect the effectiveness of a hedging strategy if an institution hedges a broad, net interest rate risk position consisting of both loans and deposits ("macro hedges"). This is because the FASB proposal does not permit hedge accounting for diverse groups of assets As a result, the accounting for an effective hedge may reflect volatility in income that is misleading." Comptroller Ludwig adds that "The systems changes required to implement the FASB proposal are substantial."
The ABA shares the concerns expressed by Chairman Greenspan and Comptroller Ludwig. We maintain that carrying derivatives and the risk in certain hedged items at fair value in the financial statements would mislead investors about the impact of hedging strategies. The ultimate goal of hedging activities is to lock in a cost or a steady cash flow. Under the FASB proposal, management will be required to adjust the accounting to fair value, which will not reflect the lock. Management does not typically rely on a measurement of fair values of derivatives and hedged items to evaluate the success of their hedging strategies. Instead, management looks to the final result of the net cash flows from derivatives and hedged items over the life of a hedging transaction to determine whether hedging strategies are effective. The SEC recognized this fact and added some flexibility to their derivatives and market risk disclosure requirements by giving entities the option to quantify market risk in terms of the results of the hedging strategy.
The ABA believes that fair values are likely to misrepresent the performance of a large portion of hedging transactions during the life of a hedging strategy. The FASB proposal makes risk management activities appear to be risk increasing activities, when, in fact, they are risk reducing activities. Further, we consider fair value information on the risk hedged in nontraded items (e.g., loans, deposits) to be highly unreliable, because there is not a sufficient market to measure many of these instruments. We fear that many fair value estimates for the risk hedged in nontraded items would be based on inconsistent and subjective factors, such as assumptions about an instrument's sensitivity to projected changes in market rates or perceived credit risk at a point in time. The fair values could vary daily and might not be rigorous enough for inclusion in the financial statements.
The FASB proposal would impose huge operational costs on the banking industry because it is so different from the way we use derivatives to manage risks. The most senior technical committee of the American Institute of Certified Public Accountants (AICPA) reportedly will advise the FASB to delay the effective date of its proposal by one year to permit enough time for systems changes and to provide additional time to understand the impact of the proposal on specific hedging transactions. The banking industry will incur more costs than any other industry because we are the largest providers and users of derivatives. The FASB has not completed a cost/benefit analysis on the proposed rule, and the latest proposal has not been field tested at all. The banking industry finds it hard to swallow the costs to implement this proposal when we believe that it will make it harder for financial statement users to understand how hedging impacts our financial performance.
Most members of the banking industry do not use the fair value of hedged items to evaluate the effectiveness of hedging transactions, whether derivatives are used or not, so systems are not in place to do the accounting and implement the FASB proposal. Banking institutions will need to train staff and test systems and procedures to ensure that the proposed rule is being implemented properly. The FASB proposal would require banking institutions to frequently calculate and track the fair value of derivatives and the fair value of the risk being hedged in certain hedged items at the transaction level. In addition, systems would have to modified to accrete fair value adjustments and amortize them based on the recalculated effective yield of the hedged item at the transaction level. The FASB proposal's emphasis on transactional hedging rather than portfolio hedging compounds the compliance costs. Banking institutions that have been investing in risk management systems to quantify and aggregate risks at much higher levels would have to develop a parallel system at the transaction level that does not facilitate their risk management practices.
At the same time, banking institutions are required by the Federal banking agencies to upgrade their systems and to resolve all Year 2000 issues by the end of 1998. Given the scarcity of resources to implement all these systems changes, some banking institutions might alter their risk management activities to avoid having to implement the proposal. The banking industry is also concerned that the operational difficulties might discourage smaller and less sophisticated institutions from using derivatives to manage risks. An analysis of one of FASB's own examples indicated an increase of 167% in the number of required accounting entries for a simple conversion from fixed rate to floating rate debt (see attached). To further compound costs, the FASB has stated that the proposal is an interim solution until it completes its project on fair value accounting for all financial instruments, which would require another systems overhaul in a few years.
On the whole, the ABA believes that the proposed new framework would create unnecessary disruptions in the financial markets and artificially raise the costs of implementing prudent risk management strategies. The proposed new framework unjustifiably continues to impose a fair value accounting model (partial and piecemeal) that inaccurately portrays hedging activities in the financial statements. In addition, the proposed new framework creates operational difficulties that we believe can and should be avoided, because it would not produce an offsetting increase in the usefulness of the accounting results.
The ABA believes that the FASB has insufficiently tested and investigated the implications of using fair value as the measurement basis for hedging activities. Before implementing such a radical change in the accounting for derivatives and hedging, we believe that the FASB should evaluate the merits of a fair value accounting model for all financial and non-financial instruments. We hope that the FASB's new project on fair value accounting will be a fair opportunity to debate whether the financial information would be more desirable than what is produced by the current model and that the fair value project will not be a harbinger of continued piecemeal fair value accounting. At this point in time, the chances of moving to a fair value model should be the same as the chances of not moving to a fair value model.
In the meantime, the ABA continues to recommend that the FASB develop an accounting model for derivatives and hedging that is based on current accounting practice. Derivatives and hedging are complex issues, and the accounting may have a significant impact on the financial markets, the economy, and the competitiveness of U.S. companies. We strongly urge the FASB to carefully re-deliberate each aspect of the latest proposal and evaluate the observations made in comment letters and testimony.
Although the FASB has been leading a march toward fair value accounting for years, they have never fully studied whether fair value is the appropriate accounting model. Even the AICPA Special Committee on Financial Reporting (which was chaired by Ed Jenkins, now the FASB Chairman) did not highly prioritize this issue. We question where the due process is for fair value accounting, which transcends today's derivatives and hedging discussion.
Historically, the ABA has opposed a fair value accounting model that is applied solely to financial institutions or solely to financial instruments. Although we believe that the use of fair values is appropriate in certain situations, financial institutions are not typically managed using fair values, so it is difficult for us to understand how such a model will provide more relevant and useful information to the users of our financial statements. For traded assets and liabilities, fair value is clearly the appropriate measurement; however, there is significant disagreement about whether debt securities held for investment, derivatives, and other nontraded financial instruments should be marked to market. If, in fact, fair value does not provide more relevant and useful information, we do not understand why it is the foundation of the derivatives and hedging proposal.
The ABA has made it clear to the FASB on a number of occasions that they should examine all the issues surrounding a fair value model before making any more rule changes that move toward fair value accounting. To our knowledge, this recommendation has never been seriously considered by the FASB. In fact, they continue to take a piecemeal approach toward fair value accounting. The FASB should study fair value accounting before requiring that fair values be used not after requiring that fair values be used.
The FASB has only recently begun a major project on fair value accounting for all financial instruments. For banking institutions, almost all assets and liabilities would be at fair value. However, few of a non-financial institution's assets would be at fair value. The FASB has not provided sufficient rationale to explain why the fundamental measurement for financial institutions should differ from non-financial institutions. If the accounting results in volatile fair values, banks would be disadvantaged in the capital markets. If, in fact, fair values misrepresent the true financial statement impact of business activities, then a fair value model could have serious repercussions in the financial services markets.
In Federal Reserve Chairman Alan Greenspan's letter to the FASB, he states that "Without reasonably specific, conservative standards for the estimation of market values, fair value accounting for all financial instruments could inappropriately increase the reported volatility of earnings and equity measurements, reduce the reliability of financial statement values, and potentially permit abuses arising from potential overstatements (understatements of asset (liability) values." We are concerned that if a banking institution is measured based on fair values, then it will need to adjust its business, such as changing product lines that are provided to customers. This may not be a good end result for bank customers.
Should the SEC investigate the implications of fair value? Although we believe that it may be a good idea, we are concerned that the SEC and FASB have already locked their arms together and determined that fair value is the only appropriate measurement for financial instruments. Additionally, there seems to be insufficient support from the SEC to conduct such a study. The SEC Chairman's written testimony before the Subcommittee on Capital Markets, Securities and Government Sponsored Enterprises of the House Committee on Banking and Financial Services (October 1, 1997) stated that: "In the future, the FASB will consider the use of fair value accounting for all financial instruments. It simply is not feasible to address all of the issues in this highly complex area at one time." (It should be noted that the SEC led the charge for using fair value accounting for debt securities, which eventually became SFAS 115.) The FASB and the SEC appear to have determined that fair value is the most appropriate measurement for all financial instruments essentially most of the assets and liabilities of financial institutions without first examining the appropriateness of such a change.
Derivatives are critical risk management tools that help to preserve the vitality of the U.S. economy and to protect the interests of investors and creditors. Companies assume many different risks when they offer products and services to meet customer needs. One of the most significant risks is setting the price for the products and services that they offer. Companies must balance the pricing demands of their customers with production costs to ensure that their investors and creditors receive a reasonable rate of return on their capital investments. To protect against a possible decay in the rate of return to investors and creditors, many companies use derivatives to manage the risk of future changes in cash flows that could either reduce revenues or raise production costs. It is imperative that investors and creditors receive financial information that accurately reflects the impact of risk management strategies on a company's financial performance.
As financial intermediaries, our members provide financial products and assume risks for the benefit of consumers and corporations. Derivatives are the most cost effective tools our members have to manage these risks that they assume. The banking industry has been at the forefront in providing information about how it manages market risk in annual reports and filings with the SEC. As early as 1993, many of the larger banks in the industry voluntarily responded to the need for additional disclosures about derivatives used in trading and end user activities that went beyond the regulatory requirements that existed at that time.
The ABA has also supported the recent efforts of the SEC and the FASB to improve the accounting and disclosures for derivatives, hedging, and market risk management. The ABA has actively participated in these efforts to ensure that risk management activities are properly portrayed to investors and creditors in a simple and clear manner. Our core belief is that SEC disclosure requirements and FASB accounting standards should give investors and creditors information that helps them analyze whether risk management strategies have a positive impact on a company's long-term financial performance without inducing competitive harm.
We believe that this proposal could have a significant impact on the way that derivatives are bought, sold, and used in the marketplace and that either the FASB or some other authoritative body should evaluate the public policy implications of certain accounting proposals. The FASB has often said that public policy considerations are not a part of its mission. If the FASB's proposal improves financial reporting, one could argue that the resulting impact on the marketplace is an appropriate one. However, if there is any question about whether investors will actually be mislead by the resulting accounting, it is critical that an evaluation of the impact on the marketplace be closely scrutizined. This is why we believe that there is a need for this hearing someone must consider market implications. If not the FASB or the SEC, then possibly Congress.
The ABA strongly opposes the FASB proposal because it would misrepresent the effectiveness of risk management strategies by incorrectly portraying the risks that are assumed by entities and distorting how the risks are managed. We are concerned about the impact their proposal could have on the financial markets, the economy, and the competitiveness of U.S. companies. The proposal would inaccurately reflect the economic effect of many sound risk management strategies in the financial statements and cause disruptive changes in risk management practices. Furthermore, changes in risk management practices could raise the cost of financial services to consumers. The following examples show how risk management strategies would be misrepresented, how risk management behavior would change, and how customers would be negatively impacted.
1. Macro Hedging: Hedging the Net Interest Rate Risk in Loans and Deposit Liabilities
A major source of funding for banking institutions is deposit liabilities, that is, checking and savings accounts. These funds are used by banking institutions to make loans to businesses and consumers. Most depositors desire a fixed rate of return on the funds they keep in their checking and savings accounts, especially when they believe that interest rates will fall. Borrowers, on the other hand, desire a floating rate loan when they believe that interest rates will fall. As a result, banking institutions are put in a precarious position where their income on loans might dwindle, but their interest payments to depositors does not drop.
To rectify the mismatch between the floating rate loans and the fixed rate deposits, banking institutions often enter into swaps to convert the net position (loans minus deposits) to either a fixed or floating rate and lock in their interest rate margin. However, the FASB proposal prohibits the use of hedge accounting when netting portfolios of financial assets and financial liabilities. The FASB proposal forces banking institutions to alter their risk management practices and convert a portion of the portfolio of loans to a fixed rate or a portion of the portfolio of deposits to a floating rate. To add insult to injury, the accounting results under the FASB proposal would make a banking institution that hedged look more risky than a banking institution that did not hedge.
For instance, if a banking institution used a swap to convert a portion of the loans from floating to fixed, the banking institution would record changes in the fair value of just the swap in equity. Recording one side of the hedging transaction in equity does not present an accurate picture of overall financial condition. If a banking institution used a swap to convert a portion of the deposits from fixed to floating, the banking institution would record only changes in the fair value of the swap in earnings. Recording one side of the hedging transaction in earnings does not present an accurate picture of operating performance.
To prevent misleading the users of financial statements, banking institutions may be forced to use cash instruments, instead of derivatives, to hedge our risks. Cash instruments, such as securities and loans, would not be subject to the FASB proposal on derivatives and hedging. Cash instruments are more expensive hedging tools because, unlike derivatives, they cannot be custom made to offset the particular risks in a portfolio of loans or deposits. Furthermore, cash instruments are more capital intensive than derivatives because they introduce more credit risk. The costs of these hedging alternatives will likely be passed on to customers in the form of higher pricing on loans or lower rates on deposits.
2. Hedging Loan Prepayment Risk
Today, banking institutions offer customers the ability to prepay their loans without penalty. This places banking institutions at risk because the income expected to be received could evaporate if customers decide to refinance their loans with a competitor. Derivatives allow banking institutions to offer this product to customers because they eliminate the negative impact of prepayment on future income. However, the FASB proposal would make the reported earnings of banking institutions that hedge prepayment risk look erratic when, in reality, earnings would be more stable.
Prepayment risk does not qualify as a hedgeable risk in the FASB proposal. As a result, it is unlikely that the change in the fair value of a derivative would offset the change in the value of a hedged loan in the income statement. Once again, banking institutions would be forced to use more expensive cash instruments to hedge prepayment risk in order to avoid the misleading volatility in earnings under the FASB proposal. The costs of using cash instruments to hedge prepayment risk will likely need to be passed on to the consumer in the form of higher interest rates on loans or a charge for the prepayment option. An accounting rule should not affect the products that banking institutions, or any other company, provides to consumers.
The ABA continues to support keeping accounting standard setting in the private sector. We are not requesting that Congress or the SEC write accounting standards. However, we believe that the process has not worked in this and certain other instances, and we believe that a fair hearing is critical not only because of this issue, but also because of the FASB's and SEC's march toward fair value accounting without sufficient study as to whether or not it is the appropriate answer.
Mr. Chairman, we appreciate your interest in accounting rulemaking and in fair and honest
accounting, and I appreciate this opportunity to present the ABA's views on the FASB proposal
and process. If you should decide to pursue any additional action with respect to this proposal or
the accounting standard setting process, the ABA would be willing to participate and to share our
thoughts. I will be pleased to answer any questions that you may have.
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