The banking system is critical to society and requires attention and support. In doing so, however, tough love is preferable to complacency.
As the COVID-19 spread and policy reactions have disrupted markets, bankers on both sides of the Atlantic have called for relaxation of accounting standards introduced in the wake of the Great Financial Crisis, known as expected credit loss provisioning. These calls, like much bank lobbying on capital regulation, should be ignored by public authorities and accounting standard-setters. There is no perfect accounting thermometer for credit risk in banks’ loan books, but breaking the current thermometer in the midst of a crisis would do far more harm than good.
Since there are two main sets of accounting standards in the world, the debate on expected credit loss provisioning is actually two different debates echoing each other. In the United States, accounting standards are set by the US Financial Accounting Standards Board (FASB), a non-profit body under oversight by the US Security and Exchange Commission. The relevant FASB standard is Accounting Standards Update (ASU) 2016-13, “Measurement of Credit Losses on Financial Instruments” (The credit loss component is also referred to in US accounting discussions as “Topic 326” or “ASC 326,” where ASC stands for Accounting Standards Codification.). ASU 2016-13 just entered into force for large listed banks, since it is to be applied on financial statements starting on or after 15 December 2019. Following a further update in November 2019 by the FASB, the corresponding date for smaller banks (all large US banks being publicly listed) is 15 December 2022. In the rest of the world, most large banks use the International Financial Reporting Standards (IFRS) set by the International Accounting Standards Board (IASB), a global standard-setting body hosted by the non-profit IFRS Foundation. The relevant IFRS standard is IFRS 9 on Financial Instruments, issued by the IASB in November 2013 and endorsed three years later by the European Union, among other jurisdictions. IFRS 9 has been implemented for some time since it became effective for annual periods starting on or after 1 January 2018. Whereas IFRS 9 and ASU 2016-13 are not identical, both are variations of the same principle of expected loss provisioning.
This article originally appeared on Bruegel March 24, 2020 by NICOLAS VÉRO
