A new rule that revamps how banks account for loan losses won’t take effect for a few years, but regulators are encouraging the banks to start planning now.
Banks should begin thinking about how they’ll be affected by the Financial Accounting Standards Board’s rule change requiring banks to book losses on soured loans much faster, the four major regulators of financial institutions said Friday. Among other things, they said, banks should assess the impact the new rule will have on their regulatory capital.
“This important accounting change requires the attention of each financial institution’s board of directors and senior management,” the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the National Credit Union Administration said in a joint statement.
The change takes effect in 2020 for publicly traded banks and in 2021 for privately held banks, though all banks are allowed to adopt the new approach as early as 2019.
The FASB’s new rule issued Thursday will require banks to book all losses they project over the lifetime of their loans as soon as the loans are issued. That’s a big change from current practice, under which banks wait to record losses until they have evidence the losses are likely. Many observers believe the current approach led to banks recording losses too late during the financial crisis, blindsiding investors.
By: Michael Rapoport (Market Watch).
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