Banks force rethink on loan rules

NEW ACCOUNTING PROPOSALS which will change the way banks record bad loans are expected to be re-exhibited after banks complained the rules would be impractical.

The proposals, released in November 2009 by the International Accounting Standards Board (IASB), will force banks to anticipate when loans will go bad ahead of time, in order to record losses earlier.

Sources close the IASB say the proposals are likely to be re-exhibited, but that this will not affect the existing deadline of June 2011. The board is likely to run a short comment period when re-exposing the draft standard.

Banks say the proposals are impractical and may force them to make subjective judgments about the health of loans sometimes 25 years ahead of time. They also point to problems in classifying loans.

Barclays’ finance director Chris Lucas, described the proposals in July as “too prescriptive and practically impossible to implement”.

RBS has also objected describing the changes as “unnecessarily complex, operationally challenging and [requiring] substantial systems cost”.

The IASB has been urged by the G20 to stop banks booking profits from loans they reasonably expect might not end up being paid off.

The proposals will move banks away from the current model, known as the incurred-loss model, which forces banks to record a loss if there is a “trigger” – an observable event which casts doubt on whether a loan will be honoured. A payment default is a frequently quoted example.

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 estimates sighted by Accountancy Age.

Veronica Poole, senior technical partner at Deloitte, said there remained questions around what data banks needed when projecting future losses.

“It makes sense to re-expose obviously it is a very sensitive area where even minor changes in the decision will have a major impact,” she said.

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Fiona Westwood of Smith and Williamson.