WASHINGTON Comptroller of the Currency Thomas Curry strongly supported an accounting proposal on Monday that may force banks to increase reserves based on predictions of credit losses in addition to looking at past performance.
Speaking at a banking conference for accountants in Washington, Curry expressed disappointment that some banks had ignored his advice last year and were now lowering allowances for loan losses faster than chargeoffs. As a result, he endorsed an accounting rule change that would require banks to hold allowances on the basis of "expected" losses, not just a "trigger" event.
"What we have seen also highlights the need for revisions in the way banks account for impairment so that bankers can start to increase or at least maintain reserves as the risks in their loan portfolios increase," said Curry in his prepared remarks before the American Institute of CPAs. If the proposed accounting "model is implemented properly, the data it uses could assist banks in better pricing loans and pre-purchase assessments of investments. It could also lead to improved credit risk management and transparency to investors. We hope the industry will agree that these long-term benefits are worth the sacrifice today."
The Financial Accounting Standards Board first proposed the so-called "Current Expected Credit Loss" model in December, which would force banks to set aside money for loans based on various predictions of the market and the life of the loan. It was a big change from the current system, where banks rely on an actual event before treating a loan as impaired.
The OCC and other regulators have supported the model as a new way to help detect and prevent another financial crisis.
"Don't get me wrong: past performance matters a great deal Without the perspective of history, we miss a key piece of the complex puzzle of understanding financial risks and how to deal with them," Curry said. "We need all the best tools at our disposal, looking back as well as looking forward, in an honest effort to get things right. I believe that the basic principles behind the proposed FASB standard take us an important step in that direction."
But the FASB plan has proven controversial because accounting based on estimations is far more complicated than the current system and would require banks to increase their data collection, resources and capital.
In his remarks, Curry acknowledged that there would be a capital challenge for some banks. Industry groups have estimated it would require some banks to increase their allowance by 300% or more but Curry says his agency predicts it's more likely 30% to 50% systemwide.
"Considering that many banks have already had to add capital in order to meet new regulatory requirements, such concerns are understandable. But we believe they are exaggerated," Curry said. "There is no question that implementation of the FASB proposal will require most banks to boost their allowance For some banks it will be more; for others, less depending on the loan portfolio and environment at the time of implementation."
Curry added that the OCC does have some worries about the "cost and inconvenience" on banks to transition into the new model. Because of this, he is pushing the FASB to help smaller banks prepare for the rule.
"We remain concerned ... about the operational impact the proposed standard may have on community banks, and have urged FASB to provide adequate implementation time for these smaller, less complex institutions and to modify disclosure requirements in light of the resource constraints these institutions face," Curry said. "We also have questions about how the model will work for debt securities, which we would hope that FASB will soon be able to answer."
The comment period for the FASB proposal ended May 31 and the board is currently reviewing comments while attempting to converge it with the International Accounting Standards Board. The implementation deadline remains unclear until FASB finalizes the rule.