About $1.2 Trillion of assets to be back on balance sheets of banks

With new accounting rules on off-balance-sheet transactions coming into effect in January, approx 53 large companies have already estimated that they will have put back an aggregate $515 billion in assets to their balance sheets during the first quarter, according to a new study of S&P 500 companies released by Credit Suisse.

The rules that force companies to put such assets back on their balance sheets were issued in 2008 and went into effect at the beginning of this year. They are Topic 860 (formerly FAS 166), which deals with transfers and servicing of financial assets and liabilities, and Topic 810 (formerly FAS 167), the rule governing the consolidation of off-balance-sheet entities in their controlling companies' financial reports.

Predictably, most of the asset increases belong to companies in the financial sector, where off-balance-sheet transactions such as securitization, factoring, and repurchase agreements are popular.

Assets are returning to balance sheets for several reasons, most notably the Financial Accounting Standards Board's elimination of QSPEs, or "Qs," in 2008, when it became apparent that the structures were being abused. Indeed, Qs were permitted to remain off bank balance sheets if they took a "passive" role in managing the structures' finances. But when the subprime crisis hit, and the mortgages being held in Qs began to fail, banks — with the blessing of regulators — took a more active role, reworking the terms of the entities' mortgage investments. At the time, FASB chairman Robert Herz called Qs "ticking time bombs" that started to "explode" during the credit crunch.

Since their enactment, the accounting rules have affected their industry big time. Of the companies reporting an impact, nine purely financial-sector outfits plus General Electric account for 96% of the $515 billion being consolidated during the first quarter, says Credit Suisse. Of that group, which includes Bank of America, JP Morgan Chase, and Capital One, Citigroup tops the list with an estimated $129 billion in assets being brought back on the books in the first quarter — which represents 7% of its existing total assets. The newly consolidated assets come in all shapes and sizes, says the report: $86.3 billion in credit-card loans, $28.3 billion in asset-backed commercial paper, $13.6 billion in student loans, and $4.4 billion in consumer mortgages, for example ($5 trillion of the $5.7 trillion held in VIEs and Qs is mortgage related). Citigroup also disclosed a $13.4 billion charge for setting up additional loan loss reserves and eliminating interest lost from consolidating the assets.