Yesterday I promised to discuss the new FASB ruling. After 11/15/09 banks will be forced to move their off balance sheet vehicles onto their balance sheets. The result will be that billions of dollars of assets and liabilities will need to recognized for banks. Most of these assets are considered to be securities and, thanks to a recent, notable FASB rule change, banks will not have to mark these assets to market. However, they will need to value these securities in some fashion. The bank vigilantes will want to know the details of these newly on balance sheet structures and will be on the lookout for favorable valuations by banks. These assets were not part of bank stress tests.
Speaking of stress tests, concern is building in the markets for smaller regional and local banks. Many of these banks are exposed to commercial mortgages which have little (if any) chance of paying off in full. Although the so-called "Big 19" banks are too big to fail, their smaller brethren are not. Distressed smaller banks will continue to put a crimp in mortgage lending. The worst of the banking crisis may or may not be over, but we are not out of the woods yet.
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