A group of top central bank governors is calling for accounting standard-setters to develop a provisioning approach for troubled loans based on an expected-losses model rather than fair value.
The Group of Central Bank Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, met on Monday at the Bank for International Settlements in Basel, Switzerland, to review the progress of a set of reforms aimed at making the global banking system more resilient. However, those same reforms could put some distance between the International Accounting Standards Board and the U.S. Financial Accounting Standards Board.
European Central Bank President Jean-Claude Trichet, who chairs the group, emphasized that timely completion of the Basel Committee reform program is critical to achieving a more resilient banking system that can support sound economic growth over the long term.
Among the goals are encouraging accounting standard-setters and supervisors to develop a robust provisioning approach based on expected losses. According to the Basel Committees guidelines on replacing the IASBs financial instruments standard, IAS 39, a sound expected-losses provisioning approach should achieve the following key objectives: 1) address the deficiencies of the incurred-loss approach without introducing an expansion of fair value accounting, 2) promote adequate and more forward-looking provisioning through early identification and recognition of credit losses in a consistent and robust manner, 3) address concerns about procyclicality under the current incurred loss provisioning model, 4) incorporate a broader range of credit information, both quantitative and qualitative, 5) draw from banks risk management and capital adequacy systems and 6) be transparent and subject to appropriate internal and external validation by auditors, supervisors and other constituents.
The IASB said Monday that its reforms to the provisioning and fair value rules would be finished by the end of this year and take effect in 2013, according to the Economic Times. However, FASB still has not given up on using fair value and may even expand its scope, especially in the area of troubled loans.
The two boards have been meeting on a monthly basis, both in person and by video conference, in an effort to converge the major points of difference in U.S. GAAP and International Financial Reporting Standards by June 2011, in accordance with the desires of the G-20 world economic leaders. Most recently they met by video conference last week and made some tentative decisions in the area of accounting for leases. However, fair value accounting promises to remain a tricky area for the two boards, especially with international banking regulators applying extra pressure.
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