Regulatory Accounting Principles (RAP)
Thrifts were allowed to be selective, only recording these unrealized appreciation gains for capital assets whose market values increased above book values; assets whose market values declined below book values could be ignored. Active in the real estate market in the 1980s, thrifts were able to book fees (2.5% of the loan amount) from originating construction loans entirely upfront instead of partial recognition to match the costs incurred in originating the loan and then ratably for the balance of the fee over the life of the loan. By buying another thrift with such assets at a heavy discount (fair market value minus book value), the thrift was able to record income over the estimated life of the assets on an interest-method basis of 10 years. Regulatory accounting principles (RAP) were introduced by the former Federal Home Loan Bank Board (FHLBB) for the savings and loan industry (thrifts) that it oversaw in the 1980s with disastrous results.
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What Are Regulatory Accounting Principles?
Regulatory accounting principles (RAP) were introduced by the former Federal Home Loan Bank Board (FHLBB) for the savings and loan industry (thrifts) that it oversaw in the 1980s with disastrous results. Regulatory accounting principles were created to assist low net-worth savings and loan associations with meeting capital requirements. The flawed accounting procedures that the FHLBB allowed the thrifts to liberally use were pointed to as one of the underlying causes of the savings and loan industry debacle in the late 1980s.
Understanding Regulatory Accounting Principles (RAP)
The relaxed rules of RAP enabled many otherwise insolvent institutions to artificially increase their reported profits and net worth. Some of the egregious accounting principles that the thrifts were permitted to apply were:
In the aftermath of the savings and loan crisis, Congress eliminated the FHLBB and, along with it, RAP. The Resolution Trust Corporation was set up and the thrifts that survived were forced to start using GAAP rules.
Related terms:
Accounting Principles
Accounting principles are the rules and guidelines that companies must follow when reporting financial data. read more
Amortization : Formula & Calculation
Amortization is an accounting technique used to periodically lower the book value of a loan or intangible asset over a set period of time. read more
Antitrust
Antitrust laws apply to virtually all industries and to every level of business, including manufacturing, transportation, distribution, and marketing. read more
Asset Sales
An asset sale is when a bank sells its receivables to another party. read more
Basis Value
Basis value is the price of a fixed asset for taxation purposes. read more
Book Value : Formula & Calculation
An asset's book value is equal to its carrying value on the balance sheet, and companies calculate it by netting the asset against its accumulated depreciation. read more
Capitalized Interest
Capitalized interest is the cost of borrowing to acquire or construct a long-term asset, which is added to the cost basis of the asset on the balance sheet. read more
Capital Requirements
Capital requirements are standardized regulations for banks and other depository institutions that determine how much liquid capital (that is, easily sold assets) they must hold for a certain level of assets. read more
Generally Accepted Accounting Principles (GAAP)
GAAP is a common set of generally accepted accounting principles, standards, and procedures that public companies in the U.S. must follow when they compile their financial statements. read more