The upcoming changes in how US financial institutions report loan losses will have significant impacts on some banks. While the effects on the banks will be unequal, it is expected that institutions with large portfolios of consumer loans as well as those with high loan-to-asset ratios may be among those that are the most impacted by the new loss accounting rule.
A look at what the changes are and how they could potentially impact the financial institutions is certainly worth a closer look.
What is Changing?
The Financial Accounting Standards Board’s is now going to require banks to make considerations for future losses on loans rather than just focusing on credit losses. What does this mean exactly? It will require US banks to have loan loss reserves. According to S&P, this will have a negative impact on capital ratios.
Expected Impacts of the New Loss Accounting Rule
Although the new loss accounting rule won’t actually take place until January 2020, banks are already indicating how it will impact them. For example, Citigroup says that the new loss accounting rule will increase its loan loss reserves by 10%-20%. Likewise, US Bancorp suggests a 20%-30% increase while JP Morgan indicates their reserves could soar to 35%.
To break it down, S&P indicates that even a 10% shift could cut seven to eight basis points off the aggregate Tier 1 capital ratio.
A Call for Study
US banks would like to see a delay in the implementation and instead focus on understanding how such changes could impact the institutions now and well into the future. Banks are also interested in presented other ideas for how to manage loan losses that may have a less severe impact.
While the Financial Accounting Standard Board has not agreed to the requests of the US banks, they are allowing banks to adopt the new loss accounting rule over a three-year period. The focus here is to implement the change in the least disruptive way possible and avoid targeting any single bank. Only time will tell what kind of impact this has on banks initially as well as years to come.
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