WASHINGTON - Federal Reserve Board Chairman Alan Greenspan on Tuesday reiterated banking regulators' criticism of an accounting trade group plan to restrict loan-loss reserves, telling a House panel that it would hamstring bank managers.
A task force of the American Institute of Certified Public Accountants two weeks ago sided with the Securities and Exchange Commission by proposing that banks reserve only for loans that have been downgraded by a lender or gone into default. The Fed and banking regulators, however, argued in a letter to the AICPA days before the proposal's release that lenders should have the flexibility to base loan-loss reserves on historical experience and economic factors.
Responding to a question by Rep. Marge Roukema, R-N.J., after his semiannual testimony on the economy before the House Banking Committee, Mr. Greenspan said the AICPA proposal would be "counterproductive to the safety and soundness of the banking system" and lead to "a very significantly suboptimum degree of bank reserving."
The central bank chief principally complained that the plan would interfere with the essence of banking by preventing management from accounting for its own risk assessments.
"The criteria that are being set up for the purposes of making a judgment as to when a generic reserve can be put in place is far too high a barrier, and indeed it tends to mechanize what is a very sophisticated banking procedure," he said. "The one thing that banking is all about is judging future losses You are going to make loans which fail, which are not repaid. You don't know which they are, or obviously you wouldn't make them. You have a general sense of what is out there.
"What differentiates good from bad bankers is those who can do that. It strikes me to inhibit that particular characteristic from being reflected on the books of the bank is a mistake."
AICPA's Accounting Standards Executive Committee is scheduled to discuss the plan at a meeting today in Seattle but is not expected to adopt a position until later in the year.
