The biggest banking lobby group in the US is raising concerns about a radical shake-up of accounting rules that would force banks to recognise losses on loans — starting on the day they are originated.
Under the current regime, banks can hold off adding to reserves until the point at which losses on the loan become probable. But under the new rule, finalised last week, banks will be made to log all expected losses over the life of the loan on day one, based on a combination of experience, their own forecasts and the current state of the economy.
The US standard-setter, the Financial Accounting Standards Board, describes the overhaul as the most significant for the banks in more than 40 years. According to FASB, the new standard — which can be adopted in 2019, before it becomes mandatory in 2020 — could help to rein in the kind of behaviour seen in the years leading up to the financial crisis, when the banks pumped out new loans even as they ran down their allowances for losses. That presented a flattering picture of the banks’ books, according to FASB, and magnified the trouble that was to come as many of the loans turned bad.
But bank lobbyists are chafing against the rule change, warning that the upfront assessment of likely losses could act as a deterrent to lending by forcing banks to weigh the potential risks more closely than before. In addition, said Michael Gullette, vice-president of accounting and financial management at the American Bankers Association, the longer-term nature of the forecast could introduce more volatility to profits and capital levels, as banks tweak their estimates from year to year.
“Changes in assumptions can mean the difference between paying a dividend or not, so you’re going to need pretty good support for these things,†he said.
Although the new standard is final, the ABA hopes to shape the way it is implemented between now and 2019. The Washington DC-based group describes itself as the voice of the nation’s banking industry, representing lenders that together keep $12tn in deposits and extend more than $8tn in loans.
Changes in assumptions can mean the difference between paying a dividend or not
– Michael Gullette, American Bankers Association
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The biggest banking lobby group in the US is raising concerns about a radical shake-up of accounting rules that would force banks to recognise losses on loans — starting on the day they are originated.
Under the current regime, banks can hold off adding to reserves until the point at which losses on the loan become probable. But under the new rule, finalised last week, banks will be made to log all expected losses over the life of the loan on day one, based on a combination of experience, their own forecasts and the current state of the economy.
The US standard-setter, the Financial Accounting Standards Board, describes the overhaul as the most significant for the banks in more than 40 years. According to FASB, the new standard — which can be adopted in 2019, before it becomes mandatory in 2020 — could help to rein in the kind of behaviour seen in the years leading up to the financial crisis, when the banks pumped out new loans even as they ran down their allowances for losses. That presented a flattering picture of the banks’ books, according to FASB, and magnified the trouble that was to come as many of the loans turned bad.
But bank lobbyists are chafing against the rule change, warning that the upfront assessment of likely losses could act as a deterrent to lending by forcing banks to weigh the potential risks more closely than before. In addition, said Michael Gullette, vice-president of accounting and financial management at the American Bankers Association, the longer-term nature of the forecast could introduce more volatility to profits and capital levels, as banks tweak their estimates from year to year.
“Changes in assumptions can mean the difference between paying a dividend or not, so you’re going to need pretty good support for these things,†he said.
Although the new standard is final, the ABA hopes to shape the way it is implemented between now and 2019. The Washington DC-based group describes itself as the voice of the nation’s banking industry, representing lenders that together keep $12tn in deposits and extend more than $8tn in loans.
Changes in assumptions can mean the difference between paying a dividend or not
– Michael Gullette, American Bankers Association
More: http://nicosiamoneynews.com/2016/06/20/us-banks-chafe-at-new-loan-loss-rules/
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