or investment banking business model. on the other hand, iasb's approach would measure financial instruments at amortized cost if they have characteristics of a basic loan and are managed on a yield basis. under the iasb approach, characteristics of a basic loan are fairly narrowly defined. for example, only the most senior tranche of an asset securitization might qualify for amortized cost. similarly, any loan with any unusual provision might not qualify for amortized cost. this approach would measure all other financial instruments at fair value predominantly through the income statement. there is a narrow exception for fair valuing certain strategic equity investments through other comprehensive income. consistent with the fasb approach, the iasb approach would modify the income statement to include all changes in fair value whether or not they are included in other comprehensive income. by now, you have gotten the picture that both of the approaches under consideration would constitute a significant departure from current practice. both of these proposals raise a number of concerns for me : • from the standpoint of relevance and reliability, the fasb and iasb approaches would not accurately reflect the traditional commercial banking model. indeed, the imbedded incentives would actually favor " originate to distribute " rather than " originate and hold " lending models. • second, we have very little actual experience in fair valuing liabilities. using fair value for liabilities introduces a new set of incentives and risk exposures for management. • thirdly, no market currently exists for non - government - guaranteed, small business loans. the lack of fair value information for these types of loans could actually discourage small business lending. • fourth : smaller banking companies likely will incur substantial costs and experience great difficulty in applying the new standards. but will financial statement users see any real benefit? • and finally, the two boards are planning to exchange views and work products, but are not duty - bound to achieving a single converged standard. if the approaches are implemented along different timelines in the united states and abroad, they could bring the two sets of standards further apart and possibly incent some governmental bodies to mandate an approach in order to level the playing field. retaining both lending and trading models my preference would be for standards that recognize both lending and trading business models for financial intermediation even when they exist within the same firm. my wish list would include the following : • trading assets shown at fair value with market value gains and losses recognized through the income statement ; • assets held for secondary liquidity shown

elizabeth a duke : regulatory perspectives on the changing accounting landscape speech by ms elizabeth a duke, member of the board of governors of the us federal reserve system, at the aicpa national conference on banks and savings institutions, washington dc, 14 september 2009. * * * good morning. i want to thank the aicpa for inviting me to speak at this year's conference on banks and savings institutions. over the years, this conference has served as an important forum for the exchange of views on regulatory matters, emerging accounting issues, new accounting standards, and new auditing considerations. this year's conference comes at a critical time : regulators and policymakers around the world are now evaluating changes to practices and structures to address weaknesses revealed by the recent financial crisis. at the same time, accounting standard setters are proposing changes that will, in turn, affect regulatory standards. these changes, along with those made by regulators and policymakers, will help determine the speed and the durability of the global financial system's revitalization. further, the accounting and regulatory changes made now will help shape future business models for financial institutions and thus influence credit availability. it is important to ensure that these changes facilitate, not hinder, the decision - making processes that support financial intermediation and economic activity. i would like to spend my time with you today talking about current and proposed accounting standards that will, in my opinion, have the greatest impact on the operation and supervision of the u. s. banking system. before i begin, i should define for you my perspective on these matters. given my background as a community banker, i feel it is crucial that an accounting regime directly link reported financial condition and performance with the business model and economic purpose of the firm. it is difficult for me to comprehend the value of an accounting regime that doesn't make that link. as a regulator, i focus on the viability of individual financial institutions and the financial system as a whole. to be frank, it has been frustrating to try to assess that viability when the value of an asset is based on the nature of its acquisition rather than the way in which it is managed or the way in which its economic value is likely to be realized. and finally, as an economic policymaker, i fully understand the integral role that financial institutions play in the overall performance of our economy. equally important are the roles played by those that trade and those that lend and by the securitization markets. and