* IASB confirms will not follow U.S. model
* IASB simplifies loan-loss proposal
LONDON, March 7 Banks must make provisions on
souring loans much sooner under a book-keeping rule that would
apply a key lesson from the financial crisis to protect
Under existing accounting rules banks are not required to
make provisions until a loss has occurred or there is clear
evidence of impairment that passes a certain threshold.
The 2007-09 financial crisis showed that was far too late,
when it then proved impossible for banks to raise fresh capital
during the market meltdown, forcing them into firesales of
assets that worsened the turmoil and ushered in state bailouts.
Leaders of the world's 20 major economies (G20) asked the
International Accounting Standards Board (IASB) and the U.S.
Financial Accounting Standards Board (FASB) in 2009 to come up
with a single global rule that recognises losses far earlier so
that banks have more time to act.
The IASB published its latest draft on Thursday, simplifying
an earlier version to make it easier to apply while still
ensuring more timely loss recognition, chairman Hans Hoogervorst
But investors face potential confusion in comparing banks
from the more than 100 countries that use IASB rules, including
the European Union, with those from the United States.
Last year, FASB decided to go its own way, saying it wanted
to recognise all potential losses on loans upfront on day one, a
step Hoogervorst said the IASB would not follow.
The IASB's revision "avoids excessive front-loading of
losses which we think would not properly reflect economic
reality," Hoogervorst said.
The IASB had proposed three "buckets" for determining the
extent of provisions but the latest draft whittles them down to
A threshold for when losses have to be recognised has also
been scrapped, meaning there would always have to be some
provisioning on loans from day one.
For loans and financial instruments where there has been no
significant credit deterioration, provisioning is limited to the
likely loss over the coming 12 months.
For those instruments where there has been a significant
deterioration, then provisions totalling the expected full loss
have to be made.
The IASB draft is out for public consultation to July and
asks for feedback on when the new rule could come into force.
FASB published its own draft rule in December which might
force banks to boost loan-loss reserves by half.