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

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

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

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.

Related reading

Fiona Westwood of Smith and Williamson.