Get ready for some sinking bank profits. The Wall Street Journal reported on Thursday (June 16) that accounting rules are taking effect that would ensure that banks would have to report loans going south much earlier than had been done before, which may push reserves higher, eating into profits.
The new rules have been issued by the Financial Accounting Standards Board. The banks would have to report all losses they would project as happening over the lifetime of the loans at the time the loans are originated. The current practice is one wherein the loans actually have to be estimated as having a likely loss to be realized.
WSJ reported that the overarching aim is to give investors better and faster information as to how loan losses are actually performing. The breadth of disclosures will also be greater than had been seen before, according to reports.
The rules were approved in April but were just recently finalized. They will take effect in 2020 for publicly traded banks and the next year for private institutions. If banks have to reserve losses upfront, then the reserves will be greater. Banking associations have also been vocal about the additional costs that would come into play in dealing with these new rules.
In addition, noted WSJ, the International Accounting Standards Board has similar rules in place, with non-U.S. banks the focus, and those rules mandate immediate recognition of losses as determined by probability of default as calculated by the financial institution.