VIENNA (BLOOMBERG) - Banks should be given three to five years until new accounting rules for loan losses have an impact on regulatory capital, according to the Basel Committee on Banking Supervision.
Accounting standards that require banks to set aside money for expected bad-loan losses will enter into force in 2018 in most of the world, and in 2020 in the United States. While the Basel Committee said it welcomes the change in principle, it said banks may have to raise provisions as a consequence and hence should be given more time to phase them in.
"The Committee currently sees the primary objective of a transitional arrangement as being to avoid a 'capital shock' by giving banks time to rebuild their capital resources," the Basel Committee said in a consultation inviting industry comments. "The Committee's working assumption is that the period allowed for transition could be from three up to five years."
Accounting standard-setters have joined official regulators in strengthening rules following the financial crisis, and the loan-loss accounting rules are one of the most important changes that are coming.
Basel's proposal to soften the impact of the accounting rules comes as banks, especially European ones, lobby against the committee's own plans to tighten restrictions on calculating capital requirements.
The International Accounting Standards Board and the US Financial Accounting Standards Board have both adopted standards that measure the expected credit loss for any loan, rather than the incurred loss of loans that turn sour. The IASB's International Financial Reporting Standard 9 will take effect in 2018, while the FASB's similar Current Expected Credit Losses standard will kick in 2020.
The committee is proposing various ways of achieving this, the simplest being to calculate capital ratios on Jan 1, 2018, taking into account the increased provisions under IFRS9, compare the result with ratios under old rules on Dec 31, 2017, and spread the difference over the three-to-five year phase-in period.
The principle makes it possible for banks to build buffers for bad loans earlier in a credit cycle, which they were in many cases not allowed to do before the financial crisis.
Basel's consultation is open for responses until Jan 13.