Proposed rules may cost largest banks £37m each

Proposed changes to bank accounting could cost the largest institutes almost
£40m each and require a root and branch overhaul of their systems according to
banks preparing to fight new proposals.

The price tag for the largest global banks, including HSBC, NatWest, RBS,
Barclays, Lloyds and Santander, could be as high as £37m each according to an
internal banking estimate sighted by Accountancy Age.

Banks are preparing to fight the new rules, which will affect how they
anticipate and measure loans bad loans.

RBS has publicly signaled its objection, describing the changes as
“unnecessarily complex, operationally challenging and [requiring] substantial
systems cost” in a submission to the International Accounting Standards Board

The IASB wants to move from the current incurred-loss model to an
expected-loss model, urged on by the G20 which is seeking to stop banks booking
profits from loans they reasonably expect might not mature.

Under the current system, banks record losses if there is a “trigger” – an
observable event which casts doubt on whether a loan will be honoured. A payment
default is an oft-quoted example.

Under the expected-loss model banks would reassess the health of their loan
portfolios each year, then downgrade profits if they “expect” a loan might not
be paid.

Future cash flows would be reset and profits downgraded in line with the
loan-loss expectations.

RBS believes the IASB model would be highly speculative, leading to “a higher
degree of management judgment and subjectivity.”

“Therefore it is difficult to see how they will result in comparability
between reporting entities,” the bank said in its submission.

Banks are proposing an alternative approach which retains some elements of
the existing incurred loss model, which they argue will provide investors with
information on actual losses, which will go on inform internal decisions about
expected losses.

Further reading:

in revolt over cost of accounting overhaul

chief speaks out on loan-loss provisions

Related reading

Fiona Westwood of Smith and Williamson.