WASHINGTON - A group of accountants seeking to standardize banks' loan-loss reserving practices has received the go-ahead to craft a plan that would give bank management a significant degree of discretion in building buffers against bad loans.
In an 8-5 vote Monday, the American Institute of Certified Public Accountants' accounting standards executive committee approved the outline of a plan by the group's loan-loss reserves task force that would depart from more stringent requirements put forward last summer.
In a draft proposal released in July, the task force recommended that banks be allowed to reserve against loans only when they had been downgraded, in the case of a commercial loan, or had gone into default, in the case of a consumer loan. The plan approved by the standards committee on Monday would do away with such triggers and let banks use a much more flexible standard for proving that a loss had been incurred.
The approval is contingent on the task force fleshing out the proposal in a manner acceptable to the committee. The ultimate approval of any such rule must come from the Financial Accounting Standards Board, which is unlikely to see a final copy of the findings until the second half of next year or later.
"This issue is critical for the banking industry," said Donna J. Fisher, director of tax and accounting for the American Bankers Association. "Banks must be permitted to use judgment to establish loan-loss reserves. Significant improvements have been made over the past few months by the AICPA, and we're pleased with this progress."