The Fed To Watch Banks Balance Sheets More Closely
WASHINGTON The Federal Reserve is keeping close tabs on financial arrangements that might be used by banks to mask their true financial positions, a Federal Reserve Board member said Thursday.
Former banker Mark Olson, in his first speech as a member of the Fed board, said the use of certain financial arrangements to shift risk from corporate balance sheets is worrisome.
"They can be used to give the appearance that a company has shed risk that it has, in substance, retained," he said in remarks at a conference on mergers and acquisitions in Miami. That, he said, "is not in the spirit of accounting rules."
A copy of Olson's speech was distributed in Washington.
Olson mentioned no companies by name. In recent weeks, Bankrupt energy company Enron Corp. and PNC Financial Services Corp. have generated controversy and scrutiny over their accounting practices.
Enron created a host of partnerships to keep ballooning debt off the company's public balance sheets. PNC Financial Services recently had to revise its 2001 earnings downward after federal regulators said the bank needed to change how it accounted for millions of dollars worth of loans.
"Though there does not appear to be a systematic problem with inaccurate treatment by bank holding companies of sales of loans to off-balance-sheet special purpose entities, in certain instances companies have not given appropriate consideration to this accounting requirement," Olson said.
Regulators will endeavor to ensure that banks provide clear and accurate financial information to the public that also meets generally accepted accounting principles, Olson said.
"The Federal Reserve reserves the right to apply its own sound interpretation of those accounting principles based on a careful consideration of the underlying facts and circumstances and the economic substance of the transactions," Olson said.
"We have exercised this right and will continue to do so when necessary to ensure the transparency of an institution's risk profile and financial condition through accuracy of its public financial statements," he added.
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