Banks will have to find billions more dollars under a proposed new accounting rule that aims to make them recognize losses on souring loans and bonds more quickly and protect taxpayers from a repeat of the financial crisis.
The proposal from the International Accounting Standards Board (IASB), whose rules are followed in more than 100 countries including European Union members although not the United States, is up for public consultation until July and is likely to be introduced in 2016 or slightly later.
The proposal is in response to repeated requests from the leaders of the world's 20 major economies (G20) to require banks to recognize losses much earlier and analysts have little doubt that lenders will end up having to set more money aside.
Critics argue the plan will put unnecessary stress on banks, requiring them to increase provisions in some instances by up to a half, and will trigger volatility in quarterly earnings as lenders make repeated adjustments to their profit and loss line.
"As this is based on forecasts and estimates, inevitably it will result in more volatility in provisioning," said Tony Clifford, a partner at accountancy and consultancy firm Ernst & Young, who described the proposed rule as the single biggest change in accounting that banks have ever had to deal with.
Critics also fear confusion because, despite G20 pressure to come up with a single global rule, the IASB and the U.S. Financial Accounting Standards Board (FASB) have failed to reach agreement, meaning it could be difficult for investors to compare banks in different parts of the world.
"Regrettably, the initial commitment of the IASB and the FASB to work together on joint proposals ended last year. This is a big disappointment," said Andrew Vials, a partner at accounting firm KPMG.
Under existing accounting rules banks are not required to make provisions until a loss has occurred or there is clear evidence of impairment that passes a certain threshold.
The 2007-09 financial crisis showed that was far too late, when it then proved impossible for banks to raise fresh capital during the market meltdown, forcing them into firesales of assets that worsened the turmoil and resulted in state bailouts.
The IASB published its latest draft on Thursday, simplifying an earlier version to make it easier to apply while still ensuring more timely recognition of losses, chairman Hans Hoogervorst said.
Last year, the FASB decided to go its own way, saying it wanted to recognize all potential losses on loans upfront on day one, a step Hoogervorst said the IASB would not follow.
The IASB's revision "avoids excessive front-loading of losses which we think would not properly reflect economic reality," Hoogervorst said.
MINE OF INFORMATION
Banks will have to spend on their systems so they can update provisions each reporting date not just for bonds and loans, but also for amounts received from the sale of goods or services, and those related to leases.
Last month the G20's regulatory task force, the Financial Stability Board, signaled increasing impatience with the IASB and FASB, giving them until December to say when their new rules would be implemented.
The FASB's own draft is also expected to force banks to boost loan-loss reserves though U.S. lenders typically already make higher provisions than their European peers due to pressure from the Federal Reserve, experts said.
The IASB had proposed three "buckets" for determining the extent of provisions but the latest draft whittles them down to two. A threshold for when losses have to be recognized has also been scrapped, meaning there would always have to be some provisioning from day one.
For loans and financial instruments where there has been no significant credit deterioration, provisioning is limited to the likely loss over the coming 12 months.
For those instruments where there has been a significant deterioration, such as when a repayment is more than 30 days late, then provisions totaling the expected full loss have to be made.
The disclosures on provisioning will give markets and analysts a "mine of information" about lending strategies and underlying assumptions being made, experts said.
Official forecasts of a downturn in the economy could prompt many banks to bump up their provisions all at once, which could make market sentiment even worse, critics have warned.
The IASB was annoyed that some European banks were slow to fully recognize losses on Greek bonds even though the country was having to be bailed out by the European Union.
(Editing by Helen Massy-Beresford and Mark Potter)