Wachovia Corp. is joining the handful of banks striving to equip corporate customers with electronic bill presentment capabilities.

The bank said last week that it had signed a letter of intent with InvoiceLink Corp. to market software that would let its corporate clients send bills over the Internet.

Wachovia is the first customer of InvoiceLink, which aims to let billers bypass the services of companies such as Checkfree Corp. and TransPoint, which consolidate bills from multiple corporations at a single Web site.

InvoiceLink said it intends to market its software primarily through banks. It has directly signed up one biller, North State Telephone of High Point, N.C.

"There is tremendous attention on the part of corporate customers to look to banks as a channel for bill payment and presentment,"said Larry Hoskins, vice president for treasury services at Wachovia. "A company like InvoiceLink is working toward banks’ facilitating that."

At least two other banks are taking a similar tack. Using software developed in-house, Chase Manhattan Corp. and First Union Corp. intend to help their corporate clients present bills electronically to retail customers.

Aiming for the business-to-business market, PNC Bank and Northern Trust have developed software to let their large corporate customers send bills electronically to smaller business trading partners.

Wachovia’s announcement, made by its corporate side, comes just days after the retail side said it would test TransPoint, the bill presentment service of Microsoft Corp., First Data Corp., and Citigroup (see FMR 3/29/99, p.3). The pilot would let 100 of Wachovia’s on-line banking customers gain access to their bills over the Internet.

With InvoiceLink, large billers can let retail customers opt to receive bills at the biller’s site, their bank’s site, or an Internet portal site. Billers basically invite the portals and banks to come and get the billing information free of charge.

The procedure contrasts with Checkfree’s and Transpoint’s consolidator model, which requires billers to send customer billing information to their sites. Consumers then tap into the billing information directly at the TransPoint or Checkfree sites, or through their bank’s site.

"With the market vying for Checkfree alternatives, creative upstarts like InvoiceLink will be an attractive choice for billers and banks," Avivah Litan, research director of GartnerGroup, wrote in a recent report.

With InvoiceLink, customers control the timing and size of their payments, using technology on which InvoiceLink expects to garner a patent.

Now that bank customers can move their money, pay their bills and get approved for a credit card on-line, they’ll soon be able to have mortgages instantly approved over the Internet, right? Probably not.

Right now, the only bank that has the technology to originate loans other than credit cards on-line, in real time, without having to call or write the customer back, is Bank of Montreal, according to Laura Starita, a specialist in Internet banking at the GartnerGroup.

She explained that the Canadian giant has made a massive investment in time and money in a behemoth data warehousing system with a decision support tool. It can take data on a customer from several different places in the bank, analyze it and decide how much risk the bank wants to expose itself to when the customer, or potential customer, asks for the loan.

For example, a customer might ask for a $100,000 loan. If the bank has already issued a credit card and a small business loan to the customer, it might only have the appetite for $80,000 of exposure. The bank could send back the request, saying it only wants to lend $80,000, or it could approve the entire loan, she said.

In a report issued December, the GartnerGroup noted that the Bank of Montreal can approve loans for existing customers as well as new customers online. Starita said, however, that approving mortgage loans in real time is a ways off for several reasons. One inhibitor, she said, is that legally a mortgage loan needs a hard signature. Another barrier to widespread use is that most banks do not have data warehousing technology because it is expensive and difficult to set up. But the big stumbling block, Starita noted, is the loss of the personal touch.

"Culturally, they’re not ready to take on the risk of automating the process. As soon as you automate the process, you give the customer the ability to price shop, which drives them into a model of making decisions not on the basis of a relationship with you, but who is providing the best deal. (Banks) want as much as possible to facilitate the early stages of the process, perhaps the prospecting part of it, or the early stages of the approval portion. But in terms of closing or the end result, they want to make that a face-to-face communication."

She said, however, that despite all of these reasons, she expects the leaders in on-line transactional banking, such as BankAmerica, which has a data warehousing system, or Fleet Financial, First Union and Wells Fargo, to improve their automated loan approval ability greatly over the next 12 to 18 months. At that point, the mortgage loan could all be done on-line, save getting the signature.

Theodore Iacobuzio, senior analyst at the Tower Group, disagreed that mortgages will be completed in real time, on-line, except for the signature. He said that mortgages are compliance-heavy and inherently need paper–reams of it.

"CRA requirements can’t be done on-line. Insurance requirements–you have to have a house inspected–it may never be done on-line (in real time). Paper is not going to go away," he said.

Starita cautioned that although banks could soon have the ability to automate loans, it doesn’t mean people will be extinct. "BankAmerica might start the process electronically but hit a glitch because of something odd about a credit report, so then they might have to get a loan officer involved. Just because they can do it doesn’t neccessarily mean they do."

A rush of banks is scurrying to set up tax shelters they think may be in danger under the proposed federal budget.

Real Estate Investment Trusts (REITs) are under fire in the federal budget proposal for the second year in a row, as the Clinton Administration tries to help states collect taxes from wily banks that have found a dodge.

While the biggest banks in the country have already jumped on the bandwagon, many of the rest are also looking to do so, according to accountants who have noticed a recent flurry of activity. Stephe Lawson, president and CEO of $1 billion-asset Cape Cod Bank and Trust Company, said he decided to make the change after hearing positive things from a peer group, and the obvious: a tax savings of six figures.

Bankers put a portion of their loan portfolio into a state-chartered REIT their company wholly owns, converting interest income into dividend income. In many states, REIT dividends are taxed little or not at all, to eliminate double taxation of corporations.

In this year’s budget proposal, the Obama Administration is seeking to limit one company’s ownership of a REIT to 50%, making it harder for banks to use it as a tax shelter. Perhaps the reason the proposal has not received much public attention is that the big banks have already taken advantage of the structure, which most likely would be grandfathered if the bill passed. Another reason is that the proposal is not among the 16 corporate tax shelters Clinton officially declared fair game–it raises no tax revenue at the federal level. It merely helps out states, some of whom have been hit hard by the loss of tax revenue from banks.

Capitol Hill watchers consider the measure’s passage a 50-50 shot at best. A few pointed to the fact that this is the second round for the proposal.

"This is not something unknown to states and it is not something the states could not change in their own laws. There is no need for federal legislation," said Chuck Wheeler, a partner at KPMG Peat Marwick. KPMG is widely credited with inventing the strategy and pushing it hard to banks whenever applicable oeven in some states where it was unclear it would work.

For example, in Massachusetts there is a 95% dividend deduction. But, the law was only clarified so that banks were certain the strategy would work at the beginning of this year. The big players have already set up REITs, but community banks, which were waiting for the law to become clearer, are just now getting to the task.

Explaining the benefit, Andrew Wilson, the tax partner in charge of Grant Thornton’s Boston office, said that if a Massachusetts bank has $100 million of loans, with an average interest income of 7%, and has a REIT, it would pay tax on around $350,000 in dividends through the REIT, rather than the much higher tax on the $7 million of interest income.

He said the strategy could still work, even if the proposed provision passed–which many observers consider a 50-50 shot at best–but it would be tricky. He said to get around the 50% ownership limit, three banks would have to be brought together. He noted that most competitors would probably not want to do business together–even to save a load of cash.

First Tennessee National Corp.’s strategy to grow its fee-income business is moving ahead with plans to transform its nationwide chain of mortgage offices into financial centers, adding insurance, credit card and brokerage services, to solidify customer loyalty and boost profitability.

"We’ve got one-product customers and we want to make them five-, six, seven-product customers. The more products you can get a customer to use and you do a good job on, then they’ll stay with you. Then they start recommending other customers to you," said Ralph Horn, First Tennessee’s Chairman and CEO.

The $18.7-billion-asset bank concluded several years ago that while being a good, solid commercial bank was key, it would also need to have a healthy fee-income franchise to prosper and to give shareholder value. That it has done, building a nationwide Dallas-based retail mortgage origination empire that ranks in the top ten in the country, a capital markets group that is the top underwriter of agency securities and can claim 30% of all banks in the country as customers, and a booming transaction processing business, ranking 11th nationwide.

Horn proudly cites statistics that rank the Memphis-based bank in the top ten banks in country for earnings-per-share growth, one of the top returnon-equity companies, with a 22.7% ROE for 1998, and one of the top-five fee income producers–64% of revenues–among commercial banks. About half the company’s bottom line comes from fee income businesses, and about half from being the top commercial bank in Tennessee. It has the number one market share in four of the state’s five metro areas.

Now Horn wants to take the company’s non-retail banking customers who are scattered all over the country–the mortgage holders–and strengthen those relationships, leveraging them into credit card, insurance and brokerage services relationships. Part of the plan to do this is the recently-embarked upon re-branding campaign to give one name and image to the company’s nine mortgage banks, credit card and other products. The bank hopes the new name, First Horizon, will smooth over reservations that a satisfied mortgage borrower, at, for example, the company’s Emerald mortgage company in Seattle, might have with a First Tennessee credit card. The new tagline, "All Things Financial," also aims to get customers thinking of the company as the place for all their financial needs.

Horn’s plan is to transform several of the company’s 167 mortgage offices in 32 states into financial centers by the end of the year, with the company’s employees taking over roles as insurance agents and brokers. He said so far the company has begun an "aggressive" strategy of marketing insurance to the current customer base and has registered 200 bank employees as insurance agents. The firm may have to hire more brokers outside of Tennessee to staff the new financial centers, but hopes to fill the posts with more of its current employees. Horn said he can see maybe 20-25 addtional offices opened in the U.S. by the time the plan is completely carried out.

Another way the bank plans to leverage its existing customer base is with its six-month-old Internet bank, which will also move to the First Horizon brand. The idea is to extend the financial center concept and garner current mortgage customers or credit card customers as retail bank customers. "We plan to access our customers and allow them to access us," Horn said.

Although the Internet bank is accessible through the main First Tennessee site, Horn said he doesn’t plan to do any mass marketing campaigns, which would be too expensive. Nor does he expect to garner many customers who are altogether new to the company through Web traffic, although they would certainly be welcome. Although the Internet bank is under First Tennessee now, as it goes nationwide, depending on state laws, it will probably have to set up as a separate subsidiary under the holding company.

Now the bank has 525,000 commercial bank customers in Tennessee, and another 500,000 customers from other businesses. Horn said he hopes the latter will catch up to the former by year-end.

He added that in the company’s commercial banking base, First Tennessee, which operates primarily out of its home state with a branch or two in Mississippi and Arkansas, currently gets two-thirds of its new customers from current customer referrals.

Another big part of the company strategy is pampering the customer. A statistic Horn is keen to point out is the firm’s 97%-98% customer retention rate. The flip side of the pamper-the-customer strategy is the company’s focus on keeping employees happy and turnover low, which has gained the bank the rank of 14th best company to work for in the country from Fortune magazine. Horn said a big part of keeping customers happy is keeping employees happy and worry-free.

Part of helping the employees to focus on their tasks and carry out the strategy of keeping customers is achieved, he said, by letting everyone in the company know that the bank will stay independent and that they needn’t worry about being taken over, or merged with another bank. "We don’t buy banks," Horn said simply, explaining that the revenue growth generated by the retail bank side of the company is all done internally. The company does not, however, have a moratorium on acquisition of fee-based companies, such as mortgage lenders. Horn stressed that the company’s superior average annual return to stockholders of 32% over the last five years, plus a 15.2% revenue growth over the decade, means the company has been doing something right.

"We don’t want to change that by being involved in a lot of merger activity." In addition, the employees are all shareholders themselves, which is another incentive to keep focused on the company’s customer-centered strategy.

"We’re a niche player. we’re not trying to cover the world. We just want to be a great bank."

The House Banking Committee reported out its version of financial modernization legislation late March 23, and the House Parliamentarian apparently granted the House committee a 45-day sequential referral to May 14, obviously slowing the momentum for the bill its supporters are trying to create.

That would doom efforts to deal with the bill in May on the House floor, as optimists had sought. And, in the Senate, Sen. Phil Gramm, R-Texas, chairman of the Senate Banking Committee, told lobbyists at the second meeting in a week that Sen. Trent Lott, R-Miss., majority leader, had asked to meet with him, and Sens. Tom Daschle, D-S.D., minority leader, and Paul Sarbanes, D-Md., ranking minority member of the Senate banking panel, when Congress returns in April.

The purpose of the meeting, Gramm said, is to see what could be done to resuscitate Gramm’s version of the bill. His bill was passed 9-7 on a partisan vote in the Senate Banking Committee, and, as a result, had not been reported out of the committee as of March 25.

The ostensible objection of Democrats is Gramm’s efforts to water down the Community Reinvestment Act mandates imposed on banks. President Clinton wrote a letter promising a veto of the bill based on the CRA provisions in Gramm’s bill even before the panel voted on it.

But that is just the beginning of the bill’s problems. While not directly linked, signals from the Clinton administration are that it will demand that Congress improve financial privacy protections as part of a package of consumer protection provisions it supports. That would virtually end banking industry support for the bill, because ability to use its customer base to market non-banking products is one of the key reasons money center banks are still supporting the bill. In fact, at a meeting of bank lobbyists earlier this month, the Washington lobbyist for Chase Manhattan Bank specifically linked his institution’s support for financial modernization legislation to Congress’s ability to maintain current provisions on financial privacy.

American Banker/Bond Buyer Despite all the shouting about e-commerce, electronically-driven financial services are still at a very early stage of their development, according to an official of a wholesale bank in the forefront of serving a full range of financial services providers.

A key component of providing that service is allowing the customer, whether a consumer, a company, a regulator or another financial services provider, to keep track of its money at all times, said Dale Carleton, vice chairman, State Street Corp.

Carleton was among a group representing regulators, academics and private industry who testified on the impact of technology on the delivery of financial services March 25 before the capital markets, securities and government-sponsored enterprises subcommittee of the House Banking Committee.

The most sobering testimony was by Arthur Murton, director, Division of Insurance, for the FDIC.

He said consolidation of the banking industry is blurring the distinction between financial services providers in general, but especially between banks and thrifts. And, he said, the consolidation is creating "megabanks." This has resulted in a concentration of assets and deposits in the country’s largest institutions. Specifically, he said, just seven banking companies hold 25% of domestic deposits.

Technological change is a key driver of this consolidation, he said, but that poses some risks to the FDIC as the deposit insurer. The deposit insurance funds face larger potential losses from the failure of a single large consolidated institution, he said.

"Larger institutions also are more complex and tend to be involved in more non-traditional activities," Murton said. "Very large banks also pose challenges when they are in danger of failing, both because of systemic concerns and because of the operational difficulty the FDIC would face in resolving them."

One key change of electronic banking is that it is spurring growth in cross-border investing, Carleton said. Another is that, "All over the world, finance is becoming oriented toward securities markets. Government control of industry is giving way to private ownership," Carleton said. "Closely owned enterprises that for decades have depended upon relationships with local commercial banks are increasingly going to global markets for finance capital."

Carleton made two other points. In the quest to achieve this end-toend information management and to be a trusted provider of financial information to the markets, a corporate culture of risk management and expertise is critical, he said. By risk management, "we mean traditional market and transaction risk, as well as information risk," he said. "Markets simply will not function unless all market participants have faith in the quality and veracity of the information on which their decisions are based."

At the same time, Carleton said, "The electronic delivery of financial services and information promises great things for U.S. and world capital markets." For example, the development of automated trading systems could enable even more efficient securities trading than is possible today–and more efficient allocation of capital by enabling investors to execute trades that are inhibited today by existing market structures. "Another benefit could be to reduce intra-day volatility by allowing a greater number of intended trades to take place more rapidly and efficiently."

American Banker/Bond Buyer TransPoint, the bill payment and presentment joint venture between Microsoft Corp., First Data Corp. and Citibank, garnered yet another big bank to pilot its Internet bill delivery program: Wachovia.

Under the pilot, 100 of the North Carolina-based bank’s Internet customers will receive and pay their bills on the bank Web site. The bank joins Bank One, Citibank, First Union Corp., InterWest, Key Bank, Mellon Bank Corp., Merrill Lynch, Norwest and Wells Fargo in the pilot. The venture aims to give market leader, Checkfree, a run for its money. Wachovia already uses Checkfree for electronic bill payment, and is reportedly considering piloting bill presentment with the firm also.

In related news, PNC reportedly will also be offering bill presentment to all of its customers through Checkfree by the end of the year. That would make PNC only the second or third bank after First Union Corp. to have on-line bill presentment, depending on if it can beat Bank One Corp. to the market, as reported in Financial Modernization Report’s sister publication, the American Banker. PNC is also getting ready to test bill presentment software from TransPoint.

Analysts have said that although Checkfree has a good product, banks are willing to give TransPoint a shot so as not to be "beholden" to Checkfree. One phrased the situation as banks wanting Checkfree–which has 80% of the market in bill payment with the all-important pay-anyone capability that TransPoint is still working to perfect–not to think it is the only game in town. Pay anyone means a customer can get all of his or her bills on-line through the bank Web sites whether the bank has a connection with the vendor or not.

Earlier this year, Checkfree announced its impending merger with Internet portal Yahoo! Analysts said the combination would be a potent one and tough to beat if banks didn’t have the cash to go out and strike a deal with another major Internet portal to grab the traffic. Although TransPoint’s program is still being piloted, and may develop even better bells and whistles than Checkfree’s, until it can master the pay-anyone technology, it will not be able to compete effectively, sources said.

A decision by the Office of the Comptroller of the Currency to allow Fleet Financial Group to provide services for its small-business customers over the Internet reopens an issue that was believed to limit the authority of national banks to offer data processing services to retailers.

The 11-page approval letter to Fleet by OCC Chief Counsel Julie Williams reopens an issue long thought to be closed by a court decision.

David W. Roderer, a Washington lawyer with Goodwin, Procter & Hoar, said that in approving the application, the agency noted the so-called "subordination requirements"–which generally limit non-banking data processing services–are not applicable. The agency said that the level of revenues from "associated traditional bank products" offered through the Web site are expected to greatly exceed those relating directly to the Web site services, and so the limits don’t apply inasmuch as "the Web site hosting activity is part, rather than incidental to the business of banking, and is thus not subject to scope limitations that apply to some incidental activities."

The data processing issue deals with a 1979 decision by a panel of the 9th U.S. Circuit Court of Appeals, based in San Francisco. Williams said in her interpretation that a 1995 Supreme Court ruling superseded the 1979 decision. The 9th Circuit decision limited the authority of national banks to offer data processing services to retailers.

The 1995 Supreme Court decision dealt specifically with annuities, but added that the OCC should be granted deference in determining whether a specific product was banking or closely related to banking. Williams argued that the 1995 ruling held that the "business of banking" is an evolving concept not limited to the powers enumerated under the National Bank Act.

The decision, which allows Fleet to help its small business customers to market their services through the Internet, is seen as allowing the majority of retail firms to do business on the Internet relatively inexpensively. It also opens an avenue for banks to expand their service offerings and increase their value to customers.

"The latest ruling acknowledges the ability of national banks to offer their small business customers a package of electronic services consisting of three components: retail Web site housing; retail payments processing; and business checking accounts," said Roderer. He also said that in holding that the business of banking encompasses a wide range of "informational services, the OCC "further opens the ever-expanding world of electronic commerce to banks.

"As full participants in developing and providing e-commerce capabilities to their retailer customers, banks might be expected to play a major role in affording efficient access to electronic markets for small businesses that might otherwise be beyond their reach," he said.

"Numerous concerns still need to be addressed, including tying, customer privacy, security and the full array of issues confronting electronic commerce," he said.

Under the approved product program, the bank will charge a one-time set-up fee and a monthly maintenance fee for a package of services that bundles traditional merchant credit card banking services with the software, hardware and technical support necessary for a small business to have its own Web site "able to accept credit card payments in a secure environment," Roderer noted, citing language in the letter.

"Significantly," Roderer said, "the Web site product, with related system support, will not be available as a separate product offering and cannot be purchased without the entire package of associated banking products and services, such as the checking account and merchant credit card relationship."

A true believer in Internet banking and commerce, Marshall & Ilsley Corp. not only seeks to replicate its banking services on-line but the immediacy of a branch and even a neighborly environment in Cyberspace where customers can talk with one another.

M&I’s own banking Web site has all the bells and whistles provided to the banking clients of its technology outsourcing arm, M&I Data Services, as well as the clients of Security First Technologies, the providers of the cutting-edge Internet banking software. What differentiates M&I’s site, however, is its effort to build an on-line community. The bank sees its Web site as a means to get to know its customers better, rather than simply replicating services on-line and cutting down on customer contact.

A year-old program has given 10,000 bank customers their own home pages that can be accessed through the bank’s Web site, a process Garry McCann, manager of on-line banking for M&I Corp., described as "the start of building an on-line community with customers like you would at a branch level." And, although it might seem the point of the Internet is to bring all customers the same level of service, the bank plans to roll out its first site for an individual branch by the end of the year.

"The virtual branch will take them (bankers) down to a level where the customer is communicating with their branch only," McCann said. The benefit of this arrangement is to strengthen relationships, and tie the customer to a banker who can work with his or her individual financial goals. Also, through the virtual branch, customers can learn about events going on at their local branch that they might have only found out about before through fliers in the building itself.

Another new bell the Web site will be rolling out by the end of the second quarter is its on-line brokerage, called MIBROKERONLINE, which will enable customers to trade on-line and see quotes in real-time.

M&I, which is a major outsourcer to community banks, not only sees getting into e-commerce as imperative for its own survival, but for its bank customers, too.

"The primary reason is delivery channels change over time," said Mike Hatfield, senior vice president and secretary of Marshall & Ilsley Corp. "The volume of traditional channels is declining, but Internet and telephone are growing at tremendous rates. If you want to continue to be in the business, we feel that if we get that hookup with e-commerce we can be viable," he said.

The $21-billion-asset bank is not only the biggest independent bank in Wisconsin, but it may become one of the leaders in home banking, following its recent acquisition of Moneyline Express, the e-payment component of Traveler’s Express, which has 20% of that market.

The company is the only other significant e-payment provider besides industry leader Checkfree, which provides a "pay anyone" service. Pay anyone means that a consumer can enter any biller onto his or her bank’s Web site and that party will be paid. Many systems now can only pay parties the bank or provider already have a relationship with.

Add to that last month’s acquisition of ADP’s electronic banking division, expected to close at the end of this month, and M&I has the business banking piece of the e-commerce puzzle. The three products it acquired from ADP, Business Express, FORTExpress and Cash Express, are cash management programs for businesses that are used by 120,000 corporate clients.

The company plans to integrate Moneyline Express’s pay-anyone capability with the ADP products to provide its bank customers with a business-to-business electronic payment service to offer business customers. Before this year’s Moneyline Express purchase, the bank already had 200 banks outsourcing this service, and it’s working to keep the 500 belonging to Traveler’s Express. The two acquisitions are components of M&I Data’s recently created electronic banking division. The business from the ADP purchase is estimated to bring in $40 million in revenue this year; estimates were unavailable for revenue generated from Moneyline Express.

The only piece of the puzzle missing is e-bill presentment, and industry watchers are eagerly watching to see which way M&I goes.

Mike Hayford, executive vice president of corporate development at M&I Data Services, the bank’s technology arm, said the company, for now, is going to focus on absorbing its new purchases. However, it is thinking ahead to develop an e-billing component. "But I don’t believe it will be via the acquisition route. It could potentially be an alliance or partnership, or we’ll build it ourselves," he said.

So why is the ability for a customer to pull up bills on-line all at once important, since only a small number of billers have relationships with e-bill presenters, and the rest of the consumer’s bills must be acquired over time from the paper mail? Because, as with all things tech, it’s the wave of the future, bank officials said. They believe bill payment service, which is gaining popularity with consumers now, will become even more popular when more billers present their bills on-line. Hayford said he thinks billers will start to provide the service more when they see the economic benefits.

"We think banks have a real opportunity to participate (and) we think banks should be aggressive in pursuing relationships with consumers through electronic banking means. The reason we believe that is we do think the payment system is going through changes and banks have the risk of somebody else coming in and providing those services. We try to make sure we have those products to offer," Hayford said.

A relatively inexpensive source of funding for banks, which an amendment to a new accounting standard appeared to threaten, was secured last week when the Financial Accounting Standards Board decided against a move that would have inflated the funding provider’s balance sheet.

The decision affected so-called repurchase agreements, or repos, in which a bank or other borrower pledges collateral in the form of securities in order to receive a relatively inexpensive loan. In what was expected to be its last meeting March 24 on the controversial amendment to Statement 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, the board decided against making the party holding the collateral book it as an asset.

The board had been leaning toward that method, which caused a flurry of protest letters from Wall Street (see FMR 3/15/99 p. 5). The board reasoned that if the collateral holder–usually broker/dealers and large commercial banks–could use the securities and profit from them, the collateral should be accounted for somehow.

Firms complained that making banks and others record the collateral as an asset and the obligation to return it as a liability would create unforeseen effects on other types of collateral arrangements that the board had not considered. Further, "grossing up" the balance sheet would deplete capital, perhaps limiting repo lenders’ ability to do the transactions and tightening an inexpensive source funding for many banks.

"It would make everybody’s balance sheet look larger and more leveraged," said Patricia Brigantic, senior associate general counsel for the Bond Market Association. She explained that besides limiting repo lenders lenders’ ability to do the transactions, a bigger balance sheet would cause frowns among rating agencies, counterparties, and others analyzing the credit.

The board reconsidered the issue last week and after looking at seven different options, decided the holder of the collateral–the "secured party"– would have to report the value of the right to use the collateral during the period it has been pledged. Halsey Bullen, FASB project manager, explained that the amount to be recorded will be relatively small under the new plan, compared with having to book the entire asset.

Several bankers were pleased to hear of FASB’s change of heart, saying that the new accounting should mean a big difference in their repo market activity. John Spiegel, chief financial officer of SunTrust, said the change sounded positive and added that he thought the collaboration of the FASB staff and the banking community is "a good thing."

Although staffers have some draft language for this section of the amendment, the board asked them to check with the Wall Street community "to see how the ideas might best be articulated," Bullen said. Brigantic’s accounting committee and representatives from many Wall Street firms will meet this week to discuss how to allocate a value to the gains from using the collateral for the period it is held. Brigantic added that the new guidance doesn’t just apply to repo transactions, but securities lending, margin loans and collateralized derivatives transactions–in short, any situation in which financial instruments are used as collateral.

Bullen added that apart from possible minor language changes to the proposed amendment, which could result in another meeting, the board now only must review the amendment in its entirety. Five board members indicated at the meeting they would support the statement.