While many banks say they haven't used special vehicles to unload debt the way

PNC Financial

(PNC) - Get Report

did last year, analysts are suddenly scrambling to quantify the extent to which banks have been shifting problem loans off their balance sheets.

While the issue could be an urgent one as the

Federal Reserve

and the

Securities and Exchange Commission

clamp down on questionable accounting, for now it appears to be an isolated incident.

"I'm sure no one did it quite the way PNC did it. But many banks could still be using similar accounting to achieve similar objectives," said Jeff Brotman, adjunct professor of law at the University of Pennsylvania.

Pins and Needles

PNC Financial's

accounting methods and earnings restatement Tuesday and

American International Group's

(AIG) - Get Report

role raised questions about whether other banks are offloading debt, particularly in light of the scrutiny corporate accounting practices have gotten following the


debacle. American International said Wednesday that its AIG Financial Products unit was part of three structured transactions with PNC. AIG said the arrangement wouldn't have any effect on its income statement, balance sheet or net worth, and said it hadn't entered any other transactions with the same structure.

On the whole, analysts say the issue isn't as significant as the reaction in the market might have suggested on Tuesday, when a number of stocks took a nosedive. Many banks immediately said they hadn't used the same kind of entities that PNC used to dispose of loans.

Goldman Sachs analyst Lori Appelbaum issued a research note Wednesday saying 12 of the banks she spoke to haven't created separate vehicles to house problem loans and other assets.

"Each has indicated to us that they have not engaged in off-balance-sheet structures for distressed assets, and there is no expectation of an earnings restatement," she said.

Bank of America

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Wells Fargo

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(KEY) - Get Report






TST Recommends

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U.S. Bancorp

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AmSouth Bancorp



Comerica Bank

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Huntington Bankshares

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National City Corp.



SunTrust Banks

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are on the list Appelbaum mentioned.

Sources close to

J.P. Morgan

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Bank of New York

(BK) - Get Report

said neither bank has created special structures.

"It seems as though PNC was the only bank to have been involved in this type of transaction," Appelbaum said.


Still, some banks have taken steps to get rid of problem loans in the past without drawing regulators' ire. In late December 2000, FleetBoston unloaded $1.35 billion in troubled loans to New York fund manager Patriarch Partners LLC, effectively creating what is sometimes called a "good bank, bad bank" arrangement.

Using this model, which was also used by PNC Financial, the "good bank" sells nonperforming loans and other assets, either through a securitization or another method, to a separate entity, the "bad bank."

If the good bank is paid with cash for the loans it sells, there is unlikely to be any risk. The difference between the prior carrying value and the cash received is taken as a loss and the "bad bank" is responsible for any further losses. But if the good bank is paid with securities, such as notes or equity, it could retain some liability.

This was the case with PNC, which was why the Fed insisted the bank consolidate the results of the loan vehicles into its own financial statements.


Mike Mayo, an analyst at Prudential Securities, said there may well be other banks that are using accounting to mask economic reality but said "we just don't have enough information." Still, he added that he expects to have a better feel for the problem when annual reports are released at the end of March.

While the uncertainty surrounding accounting issues may plague the banking sector for some time, analysts say PNC's announcement has ultimately been good for the industry.

"What you're going to see is an industry that's much more disciplined in its accounting," said Anthony Polini, an analyst at Advest. "There will be less off balance sheet starting in the first quarter."

Pollini also said the risk is "a lot less than the fear-driven mentality would tell you it is." PNC sold $12 billion in traditional loans, but just $500 million in nontraditional loans, "which is about the same as other companies," he said.

"These are isolated, unique events and not something that will plague the industry," he added. "The virus will be cleared up in a relatively short period of time."