Banks voice fears at IASB proposals

Banks have been quick to condemn the new accounting proposals for loans, which they argue are impractical, costly and misguided.

Letters are still pouring into the International Accounting Standards Board (IASB), despite the formal comment period closing more than two weeks ago, with Lloyds TSB, RBS and Barclays all sounding similar notes of alarm at the new rules.

Current rules allow banks to record a loss from a loan if there is an observable trigger event which suggests it might not be paid. New rules would force banks to anticipate losses over the life of the loan, and recognise it all on day one.

The expected loss figure would be comprised of interest rate risk and credit risk. Banks say these risks should be kept well apart. “The ‘co-mingling’ of con­tractual expected interest rate data with non-contractual expected credit losses in a single…calculation, while theoretically sound, is not consistent with the way banks collect data and manage loan portfolios,” said David Joyce, group chief accountant with Lloyds TSB in his submission to the IASB.

A second concern revolves around how banks group their loans. The IASB suggests banks do so in closed portfolios, characterised by a specific start and end date. While many US banks use this approach, it is less common in other parts of the world where banks use open portfolios, with loans added and removed daily.

Douglas Flint, chief financial officer at HSBC, said a move to closed portfolios “would be a hugely onerous task”.

Complicating matters, the IASB is attempting to marry its final proposals with those being considered in the US. Sir David Tweedie, IASB chairman, told a meeting of trustees this month he “will try to get together with [US standard setter] Financial Account­ing Standards Board to see if we can get to a proposal together”.

However, while the IASB model recognises losses during the life of a loan, FASB’s model uses past events and asks banks to consider their implications on the collection of a loan.