US loans initiative could hit lending
BANKS COULD be deterred from lending under a new approach to bad-loan provisioning being developed in the US, according to the head of the body that sets rival international accounting rules.
In another sign of how attempts to create global accounting rules have unravelled, Hans Hoogervorst, International Accounting Standards Board (IASB) chairman, criticised a more conservative attitude to bank accounting that has gained favour in the US.
The former Dutch finance minister claimed the method, which involves upfront recognition of all expected lending losses, could have “unintended consequences”.
The “day one” losses it would entail could encourage financial institutions to cut back on new lending in tough economic conditions to boost profits, Mr Hoogervorst said.
The financial crisis was exacerbated by accounting rules that allow banks to avoid setting aside money to cover losses, which they know are likely to happen.
Governments have pushed for a forward-looking, globally consistent system that factors in expected losses in addition to those that have been demonstrably incurred. However, disagreement over the details has delayed this reform.
The IASB sets the International Financial Reporting Standards used in the EU, Canada, Brazil and elsewhere.
It wants banks to make provisions for a year’s expected losses on lending, as well as carrying out more aggressive writedowns when necessary. – Copyright The Financial Times Limited 2012