The following is an excerpt from a conversation. Critique it.

Appleton : That’s simple, Mike. The BIS stipulations are minimum levels, whereas the Treasury proposal gives banks choices above the BIS minima. What bothers me about the BIS guidelines, though, is that they also require banks to hold capital against off-balance sheet items. When these items get on the balance sheet, there is another capital requirement against them, so aren’t we in a sense double counting?

Butterworth : Not really, because there is not simultaneity involved. I think that with a trillion dollars in outstanding loan commitments alone, the issue of the contingent liability exposure of American banks is something that we just have to come to grips with. The way that RAP (Regulatory Accounting Principles) and GAAP (Generally Accepted Accounting Principles) have dealt with these contingent liabilities has been deplorable. I strongly believe depository institutions should be made to recognize these liabilities on their balance sheets, not merely in footnotes.

Appleton: Beth, I think you are getting a bit carried away. Nobody has any idea how these contingent liabilities should be valued, so how do you quantify your exposure?

Butterworth : Speak for yourself, Alex. There are valuation models available, although I will admit they are far from perfect. But even noisy information is better than none.