To the Editor:

In a Dec. 1 Viewpoints article, “Plan to Restrict Reserving Is a Nightmare, Ludwig Says,” Gene Ludwig, the former comptroller of the currency, argues that the American Institute of Certified Public Accountants’ proposal to limit loan-loss reserves would prevent banks from putting away funds for the inevitable “rainy day.” This, he worries, would increase the possibility of bank failures in the next recession.

What Mr. Ludwig forgets, however, is that there is another rainy-day fund available to banks. It is called “capital.”

The transfer of funds to a reserve account does not save or defer taxes, and there is no law or regulation that requires banks to pay any fixed portion of their earnings as dividends. Therefore, if a bank does not transfer funds to a loan-loss reserve, those funds do not disappear — they simply remain in the capital accounts of the bank.

If management believes it needs an additional cushion to protect against risky loans (or even the usual risks of its business), it is just as appropriate to strengthen capital as to create additional reserves. This may affect reported return on capital, but that is a small price to pay to eliminate what even Mr. Ludwig called the possibility of a “modest problem regarding managed earnings,” and strong capital should let him sleep soundly.

Edward L. Levine
Former member
Committee of counsel
New York Clearing House Assn.

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