Banks Brace for Accounting Change

Banks stocks have rallied since dipping to their March lows, but new accounting rules set to take effect at the end of the year could weigh on their balance sheets.

The Financial Accounting Standards Board, or FASB, earlier this month quietly amended FAS 140, effective at the end of the year, eliminating qualified special purpose entities, or QSPEs. If you thought mark-to-market accounting changes had an effect on the banks, hold onto your hats.

The special purpose vehicles allow banks to stash things like asset-backed securities and other unwanted assets, reducing the amount of reserves they need to hold. The QSPEs also are a great way to hide losses.

Citigroup (C) had $822 billion in QSPE exposure last year, according to its annual report. That's tops among the four largest banks.

"While these proposed standards have not been finalized, they may have a significant impact on Citigroup's consolidated financial statements," Citi said in the report.

Surprisingly, JPMorgan Chase (JPM) is second among the big four, with a whopping $640 billion. JPMorgan said in its annual report that bringing these items back on the balance sheet could reduce its Tier 1 capital ratio by 80 basis points.

Bank of America's (BAC) QSPE exposure was a comparatively modest $81 billion and Wells Fargo (WFC) rounded up the group of four with $39 billion. BofA warned that eliminating QSPE's "may result in an increase in outstanding loans ... higher provision and allowance for credit losses."