Accounting rules have been shaken up and many members of the banking lobby in US are concerned about what it would imply. It might force banks to be able to accommodate losses on loans. That might be difficult to accept by banks, as the rules would also include recognizing the losses from the day the loans originated. Take A Look at a new rule that is to be implemented for US banks.
Current scenario and changes proposed
The regime that exists now allows banks to hold off on adding to the reserves till a point is reached when a loan is a probability. However, with the new rule that has been finalized, banks need to log all expected losses which originate from day one of a loan. The losses need to be logged based on the following factors:
- Forecasts of the banks
- Current economic state
The overhaul is set by the Financial Accounting Standards Board that states that the overhaul was necessary and will bring about changes in banking decisions that will see significant differences as compared to the last 40 years of their operations. The new standard will be adopted since 2019 and it would become mandatory from 2020. It would help to rein in the kind of behaviors that banks have exhibited which has led to financial crises coming up. Banks have offered loans even when their allowances have run down and been in losses. This had looked pretty in the books of the banks, which only increased the troubles for the banks when their loans turned into non performing assets.
What bank lobby says?
The rule change is being chafed at by bank lobbyists. They warn that the assessment of the losses that are likely will become a deterrent and reduce lending to a large extent. As banks weigh in the potential risks more it would lead to less loans being meted out. As the vice president of the American Bankers Association pointed out, if the forecasts were to be of longer terms it would make profits more volatile and so would capital levels become. Banks are known to change their estimates by the year. To know Why Is It Important To Embrace Online Banking – Visit This Link.
If estimates and assumptions are changed every year it would mean whether a dividend is being paid or not. There would have to be a good support system and expert predictions in place. The new standard is finalized, but ABA feels that they can shape the way the rule would be implemented between the current period and by 2019. The banking industry is voiced by the American Bankers Association, which is based out of Washington, DC and their voice is considered to have a lot of weightage in the banking industry. The lenders who are part of this association account for $12tn of assets in deposits who forward about $8tn in terms of loans. If there would be changes in assumptions it would mean that there would be a difference in whether a dividend is paid or not. However the new rule is supported by many as they feel that the new rule would be cleaner and simpler and helps to align the underwriting economics and informational needs of investors.