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Support for impairment reform in the U.S. banking industry

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Sep 26, 2013

U.S. Comptroller of the Currency Thomas Curry gave a speech at the AICPA Banking Conference earlier this month and discussed the risk of declining loan loss allowances and the need for revision in the way banks account for impairment. He expressed his support of the FASB's proposed "expected loss" model and explained the impact the model would have on banking institutions.

Mr. Curry discussed how the financial crisis revealed a flaw in the incurred loss model:

By requiring banks to wait for an 'incurred' loss event to recognize the resulting impairment, the model precludes banks from taking appropriate provisions for emerging risks that the bank can reasonably anticipate to occur. The result too often has been the need for banks to make large loan loss provisions in the midst of a credit downturn, often when earnings and lending capacity are already stressed. This leads to pro-cyclicality and results in delayed loss recognition.

He acknowledged that no loan loss methodology would have prevented the financial crisis. Mr. Curry also noted that amendments in FASB Proposed Accounting Standards Update 2012-260, Financial Instruments — Credit Losses, is consistent with his office's "risk-based and forward-looking" approach to supervision, so national banks and federal thrifts should have an easier time transitioning because of their familiarity with the Comptroller's oversight.

He stated, "the FASB proposal is consistent with the goal of supporting and reporting on the balance-sheet integrity and the ability of financial institutions to fully consider all information, past, present, and future, and to do it early, when risks are building, in determining what amount of allowance is the right amount." He also stressed one point that clearly differentiates the suggested FASB model from the IASB model: "Further, the proposal would create one consistent measurement approach for all financial assets not accounted for at fair value through net income, thus simplifying the system of multiple credit loss models."

Please click for the full text of the speech on the Office of the Comptroller of the Currency Web site.

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