US comptroller of the currency John Dugan yesterday asked if an accounting
rule used to determine future loan losses might have made things worse for the
banks in the downturn.
Banks use an accounting standard to calculate an incurred loss if they are
certain that the loss is probable and can be reasonably estimated.
Historical results are used to estimate incurred losses. Dugan argued that
this has been difficult given the recent long period of benign economic
conditions in the lead-up to the downturn.
When the good times ended, banks were forced to start recognising the losses,
eating into capital.
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