Monday, April 5, 2010

US banks in $2.5bn ‘Christmas capital’ gain

By Suzanne Kapner in New York, Financial Times

Published: April 4 2010 22:30 | Last updated: April 4 2010 22:30

US banks earned $2.5bn last year from an accounting rule that enables them to book gains – known as “Christmas capital” – by buying assets at a discount, a new study shows.

More than half of all acquisitions of failed banks last year resulted in such gains, according to SNL Financial, which compiled the data.

For some banks, the gains contributed to the lion’s share of their income for the year.

It emerged last week that leading bank regulators were discussing guidelines to limit how much of a bank’s capital can be comprised of such gains, according to people familiar with the situation.

“Regulators are trying to get their hands around what is real capital and what is accounting capital,” said one person who has worked on some of these transactions.

In normal bank acquisitions, buyers pay above market prices and record the difference as goodwill, which is written off over time.

In sales of failed banks by the Federal Deposit Insurance Corporation, the opposite is happening. Assets are being purchased at below market value and buyers are recording the difference as a gain, known as the bargain purchase option or negative goodwill, which translates into an increase in capital.

Because of an accounting change last year, this is the first time that the gains – also dubbed “Christmas capital” – are showing up as an immediate boost to earnings.

Before the change, the gain would have been capitalised on the balance sheet as deferred revenue. Of the 75 banks that recorded such gains last year, more than 13 per cent saw a significant boost to income as a result.

The largest beneficiary was United Central Bank of Garland, Texas, which recorded a $271m bargain purchase gain when it bought the assets of Mutual Bank, based in Harvey, Illinois. That gain amounted to 85 per cent of its operating revenue and 96 per cent of its income.

Any move by regulators to tighten the rules is a sign they feel more confident about the health of the financial system. But the restrictions could also limit the pool of bidders for the assets of failed banks.

“It will make these deals less attractive,” said Ernest Patrikis, a partner with the law firm White & Case, who specialises in banking.