* U.S. banks pan accounting change to speed up loan reserves
* Banks urge alignment of U.S. and international rules
By Dena Aubin
NEW YORK, May 13 More than a dozen of the
biggest U.S. banks have questioned a proposed accounting change
meant to boost reserves for risky loans, saying the results
would be vastly different from those of a similar rule being
developed by global standard-setters.
A key reform arising out of the 2007-08 global financial
crisis, the proposal would require banks to look ahead and
reserve for expected losses on the day a loan is made.
Currently, banks do not have to reserve for risky loans
until there are signs of a loss.
Reserves were criticized as being "too little, too late"
during the global crisis, when major banks were buffeted by
defaults on loans and other debt. Many had to be bailed out
because they had not set aside enough for losses.
Numerous banking regulators have called for more timely
reserves, though critics have also warned that proposed
accounting changes would make quarterly earnings more volatile
as banks adjust their expectations for losses.
In a letter to accounting rule-makers, banks suggested that
trying to predict losses too far ahead would be unreliable.
Banks signing the letter included Bank of America Corp
, Citigroup Inc, JPMorgan Chase & Co and
Morgan Stanley. Spokesmen for the banks either declined
to comment or did not respond to requests for comment.
The letter, dated May 10, was addressed to the
Connecticut-based Financial Accounting Standards Board, which
sets U.S. accounting standards, and the London-based
International Accounting Standards Board, which sets
FASB is seeking comment on its proposal through May 31, and
its details may change. Analysts said it would likely not be
effective before 2015. A separate rule on loan losses was
proposed by the IASB in March.
50 PCT JUMP IN RESERVES POSSIBLE
The letter intensified pressure on the two boards to align
their rules. U.S. companies use FASB's generally accepted
accounting principles, or GAAP. Much of the rest of the world
uses IASB's international financial reporting standards (IFRS).
The two boards have been working for over a decade to merge
their standards. Financial accounting has been a key focus since
the global crisis, but the boards parted ways on loan loss
accounting last year.
"Relative to the IASB's proposal, the FASB's proposal would
generally require entities to recognize allowances for credit
losses sooner and in larger amounts," said Bruce Pounder,
director of professional programs at Loscalzo Associates, a
Shrewsbury, New Jersey-based accounting education company.
The balance sheets of U.S. banks could look significantly
worse than that of banks using international standards, even in
identical economic conditions, he said.
FASB officials have estimated some U.S. banks may have to
increase their reserves by 50 percent under its proposed change.
BANKS SUGGEST ALTERNATIVE
Donna Fisher, a senior vice president at the American
Bankers Association, said banks are trying to get
standard-setters to agree on a middle ground.
"The FASB model will result in significantly larger, more
volatile and less reliable (loan loss) allowances," Fisher said.
FASB's proposal would require businesses to look at both
past experience and reasonable estimates of future losses, and
reserve for those losses the day a loan is originated.
The IASB's proposal would only make banks consider losses
expected over the next 12 months, unless a loan's credit has
deteriorated significantly. If that is the case, reserves would
have to be made for the full expected loss.
Friday's letter said banks had concerns with both models. It
suggested losses be estimated over 12 months, or the period that
could yield reliable estimates, whichever is greater.
FASB spokeswoman Christine Klimek said the board will
consider the bank's suggestions along with other feedback.