WASHINGTON – Bankers are raising concerns that a new Financial Accounting Standards Board (FASB) proposal that would allow banks to set aside reserves for future losses is too open-ended and might result in banks putting too much aside.
Financial institutions and their regulators have battled for years with the accounting standards entity over the proper way to move away from the pre-crisis requirement that banks set aside reserves only when a loss had already been incurred on a loan. The goal has been to achieve an "expected-loss" scenario that lets banks look into the future in setting such reserves to avoid the type of financial whiplash that occurred during the crisis, noted American Banker, an affiliate of Credit Union Journal.
Although FASB ostensibly moved closer to that goal this week, issuing a proposal that would move toward such a model, the industry now fears it might have gone too far, forcing banks to reserve for expected losses over the entire life of a loan.
"If the interpretation by the regulators or the audit firms is life of loan, then it is going to become very, very punitive," Raj Mehra, CFO Middleburg Bank in Virginia, told American Banker.
The latest proposal is a move forward by standards-setters to bring international financial accounting in line with 21st century credit markets.
But the process hit a significant snag over the summer when FASB pulled away from agreeing with the International Accounting Standards Board on a common approach to loss-reserve accounting. Many in the U.S. were concerned FASB’s method was too complicated, did not reflect the accounting needs of a U.S sector with so many community banks and a requirement that only allowed a one-year projection period. Regulators and industry representatives feared that such a short time-frame could force some institutions that had been projecting further out would have to reduce their loss allowances.
But rather than propose a longer period, FASB’s proposal did not suggest a time threshold at all. Under the proposal, institutions would be required to write down assets based on the historical performance of similar assets, current economic conditions and “reasonable and supportable” predictions about future events that could affect the asset’s performance.
The proposal also is being interpreted as expanding the types of assets included in the new accounting model, which might force community banks to include their debt securities.