Some of America’s largest banks have asked the Trump administration to hold off on implementing new rules that would change the way banks book losses on their loans. Especially hard hit would be community banks. The bankers told the Trump administration the new rules could reduce lending, especially in depressed economic times. Michael Rapoport writes at The Wall Street Journal:
The new loan-loss rule drawing fire from banks will require firms to immediately book all losses that they project their loans will ever suffer, as soon as the loans are issued. That is a significant change from the current approach.
Currently, banks wait to record losses until they have evidence they are likely to happen. Many observers believe that approach led banks to record losses too late during the financial crisis, leaving investors in the dark and blindsiding them when losses were ultimately disclosed.
The new, quicker approach is expected to require some banks to set aside more in reserves for loan losses, which would cut into profits and bank capital. In some cases, the additions to reserves could be significant, though amounts would differ from bank to bank and depend on a firm’s outlook for the economy and its loan portfolio.
The idea behind the change is to give investors more information about banks’ condition, on a more timely basis. But some banks have expressed concerns that the new rule could be costly and burdensome.
If a bank has to book all its expected loan losses immediately, “it could be expected that certain kinds of lending that are more risky in the marketplace could be curbed,” said James Kendrick, first vice president for accounting and capital policy at the Independent Community Bankers of America. That group has complained about the loan-loss rule in the past but wasn’t involved in the letters to Mr. Mnuchin. “Everyone is spending money for adopting the standard,” he added.
Read more here.
Jeremy Jones, CFA
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