A.M. Best Special Report: Bank Loan Reserves Too Cyclical; ALLL Methodology May Evolve

OLDWICK, N.J.--(Business Wire)--
U.S. banks` loan loss reserves are lagging behind delinquent loans, and the
shortfall is drawing scrutiny to the methodology for calculating this
reserve-the Allowance For Loan and Lease Losses (ALLL). Most agree that ALLLs
should peak just before delinquencies surge, but historically the opposite has
tended to occur.

* U.S. Comptroller of the Currency John Dugan has called for a new look at the
methodology for determining the ALLL. The Treasury Department made a similar
recommendation in its white paper, "Financial Regulatory Reform" issued in June
2009.
* At odds are accountants representing bank regulators, who are concerned about
economic cycles and potential mismatches between banks` credit costs and loan
revenue and accountants representing standard-setters, who are concerned about
theoretical accounting integrity and preventing earnings management.
* The accounting standard-setters, IASB and FASB, have jointly discussed various
approaches to estimating the ALLL and issued a number of Agenda Papers on
theoretical issues behind banks` difficulties with current accounting.
* The main controversy is over the "incurred loss model" and the feasibility of
determining precisely when a loan loss occurs.
* Some believe "fair value," "Spanish provisioning" or "expected loss" may be
viable alternatives to the incurred loss model.
* A.M. Best Co. believes more attention should be focused on risk-especially
relative to loan pricing-and the need for meaningful risk data in setting either
capital or ALLL levels.

To download a PDF copy of all banking special reports at no cost and to access
data, analytical methodologies and news on the U.S. banking industry, please
visit www.ambest.com/banks.

Founded in 1899, A.M. Best Company is a global full-service credit rating
organization dedicated to serving the financial and health care service
industries, including insurance companies, banks, hospitals and health care
system providers. For more information, visit www.ambest.com.

A.M. Best Co.
Analysts
Diane Goodheart, 908-439-2200, ext. 5649
diane.goodheart@ambest.com
or
Khanh Vuong, 908-439-2200, ext. 5633
khanh.vuong@ambest.com
or
Public Relations
Jim Peavy,908-439-2200, ext. 5644
james.peavy@ambest.com
or
Rachelle Morrow,908-439-2200, ext. 5378
rachelle.morrow@ambest.com

Copyright Business Wire 2009