WASHINGTON -- Banks should follow uniform rules when setting reserves for potential loan losses. according to the General Accounting Office.
In a report released last week. the investigative arm of Congress studied 12 banks. each with assets of more than $1 billion, and found their methods of establishing reserves deficient.
"Investors, creditors, depositors. regulators, or other financial report users [are not] able to meaningfully compare the institutions' reserves in judging their adequacy and the quality of the institutions' loan portfolio," the study said.
The report was sent to the House and Senate banking committees but was initiated by the GAO.
The GAO recommended that the Financial Accounting Standards Board work with banking regulators to develop a common method of establishing loan-loss reserves.
Banks should evaluate large loans individually and set aside enough money to cover likely losses, the study suggested, while regulators should give detailed instructions on estimating losses in the rest of an institution's portfolio. All reserves should be justified by current loss exposure in banks' loan portfolios, the GAO added.
However, FASB project manager Janet Danola said establishlng loan-loss reserves is unavoidably subjective. It would be next to impossible to impose a unified, objective method, she said.
"Implicit m determining loanloss reserves is a lot of judgment," Ms. Danola said. "If we took away that judgment, loanloss reserves may not accurately reflect the loan losses of the individual institution."
Current regulation provides an appropriately flexible framework" for both banks and examiners according to the Comptroller of the Currency's office.
"Because of the subjectivity and the risk of error and iraprecision in the entire allowance allocation process, the OCC believes that some margin for error is desirable." Senior Deputy Comptroller Judith A. Walter wrote m response to a draft of the report.
The 12 banks studied used widely varying periods of past experience to develop loss rates. Some reached back as little as 12 months; others, as much as several years.
More than 30% of the total loan-loss reserves for seven of the banks were supplemental reserves not supported by evidence showing that losses were likely and reasonably estimated. the GAO reported. One bank's reserve was $612 million more than what was justified by its own portfolio analysis.
