NEW bank accounting rules are set to force lenders to make more realistic estimates of loan losses, recognising bad debts more quickly and giving investors a better idea of the position of the firms, the International Accounting Standards board (IASB) said yesterday.
Currently banks make provisions when loans go bad. Although that is intended to keep a track of losses and reflect reality, in practice it can delay the acknowledgment of bad loans and even encourage banks to roll over debts which they know will not be paid back, simply to improve the appearance of their balance sheet.
The new plan will see banks make provisions for expected losses on portfolios of loans, allowing investors and regulators to keep a better track of their true health.
The proposal is in response to repeated requests from the leaders of the world’s 20 major economies (G20) to require banks to recognise losses much earlier and analysts said yesterday there was little doubt that lenders will end up having to set more money aside.
Some analysts warned that the plan will put unnecessary stress on banks, requiring them to increase provisions in some instances by up to a half, and will trigger volatility in quarterly earnings as lenders make repeated adjustments to their profit and loss line.
“As this is based on forecasts and estimates, inevitably it will result in more volatility in provisioning,” said Tony Clifford, a partner at accountancy and consultancy firm Ernst & Young, who described the proposed rule as the single biggest change in accounting that banks have ever had to deal with.
Critics also fear confusion because, despite G20 pressure to come up with a single global rule, the IASB and the US Financial Accounting Standards Board (FASB) have failed to reach agreement, meaning it could be difficult for investors to compare banks in different parts of the world.
The rules are up for public consultation until July and are likely to be introduced in 2016.