'Robust provisioning approach is essential', say bankers
1 Feb 10
Top central bankers are increasing pressure for speedy reform of the accounting rule blamed for amplifying the credit crunch and warned it must not widen the scope of a much-criticised asset valuation method
The group of central bankers and heads of supervision said the Basel Committee on Banking Supervision, which it oversees, should come up with proposals by March on how banks make provisions for soured loans.
The aim, as pledged by the G20 group of leading countries last November, is to ensure banks make provisions for troubled loans far earlier than under the current “incurred loss” system, so downturns are smoothed out and bank capital is topped up.
Policymakers hope this will lessen the need in future crises for a repeat of the billions of dollars in government money the banking sector has needed to remain stable.
“It is essential that accounting standards setters and supervisors develop a truly robust provisioning approach based on expected losses,” the group, chaired by European Central Bank President, Jean-Claude Trichet, said.
“A sound expected loss provisioning approach should address the deficiencies of the incurred loss approach without introducing an expansion of fair value accounting.”
The International Accounting Standards Board (IASB) has said its reform of provisioning and fair value rules will be completed by the end of this year and take effect in 2013.
“What the group is asking us to do is broadly consistent with what we have said in the proposals we have published in November 2009 on moving to an expected loss model," an IASB spokesman said.