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U.S. banks push back on change in loan loss accounting

A bicyclist rides past a Bank of America in Tucson, Arizona January 21, 2011. REUTERS/Joshua Lott
A bicyclist rides past a Bank of America in Tucson, Arizona January 21, 2011. REUTERS/Joshua Lott

By Dena Aubin

NEW YORK (Reuters) - 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 international rules.

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.

(Reporting by Dena Aubin; Additional reporting by Huw Jones in London; Editing by Richard Chang)

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