New loan loss rules expected early next year

NEW ACCOUNTING RULES on the way banks provision for loan losses are expected to be unveiled by the IASB early next year.

The global standard setter has been working to replace the discredited impairment model, based on incurred losses, with a more forward-looking approach for the past two years.

The current impairment model was criticised for leading to overstated profits and understated liabilities, contributing to the banking crash in 2008.

US standard setter FASB had been working with the IASB to create a single expected loss model for financial instruments as part of the project to converge IFRS. The two accounting boards have since split, with FASB advocating upfront recognition of losses, distancing itself from the IASB's 'three-bucket' approach.

The first bucket, under the IASB's plan, would contain 'healthy' assets – those for which banks expect a reasonable return and need only make minimal provisions. Bucket two is reserved for assets with some level of impairment, but which are not completely useless, while bucket three is for assets that are undeniably 'bad'.

The Telegraph understands that stress-testing by major UK banks found that, based on the new rules, provisions for loan losses would have to increase between 30% and 100% dependent on the institution.

Last week, Sir David Tweedie, the architect behind the creation of IFRS and the revision of the impairment model, dismissed claims that the rules were at fault for failings in the way banks provision for loan losses.

Writing in ICAS' member publication, institute chairman and former head of the IASB Tweedie said he "totally disagreed" with the view that "global accounting rules prevent banks adequately provisioning for future loan losses".

Tweedie's comments contradict Andrew Haldane, the executive director for financial stability at the Bank of England, who wrote in the Financial Times last month that global accounting rules "contributed to an overvaluation" of legacy assets, as they prevent banks adequately provisioning for losses.