Could Ballooning Loss Reserves From New Accounting Rules Deflate Bank Capital Ratios?

Could Ballooning Loss Reserves From New Accounting Rules Deflate Bank Capital Ratios?

Sweeping new rule changes for the way banks estimate credit losses in their financial reports likely will have a significant impact on banks applying International Financial Reporting Standards or U.S. Generally Accepted Accounting Principles. The changes are the culmination of a key objective to shift the accounting for credit losses to a more forward-looking, counter-cyclical credit impairment model that will require earlier recognition of credit losses–a weakness highlighted during the last financial crisis. As a result, capital and earnings could become less predictable and bank managements may seek to build higher capital buffers to mitigate this effect, although the extent to which bank regulators will adapt regulatory capital requirements remains to be seen. Higher loan-loss reserve levels may also affect banks’ planned distributions of capital in the form of dividends or share buybacks. Bank managements may take actions such as increased pricing on certain loan products or shortening loan durations, to help offset the potential accounting consequences



The Association of International Wealth Management of India (AIWMI) is a not-for-profit organization and a globally recognized membership association for finance professionals. AIWMI primarily focuses on the broad and strategic role of developing a more robust and forward-looking training infrastructure for the financial services sector and to promote more active industry involvement and collaboration in training and continuing education. AIWMI is offering advanced international certification programs along with a wide variety of high-quality executive education programs. AIWMI programs combine state-of-the-art knowledge and skills with practical experience and insights into the functioning of the financial sector. All AIWMI courses and educational events have an intense and pragmatic curriculum. Participants are exposed to the latest developments within the financial services sector. AIWMI plays a key role in guiding the development of the financial services sector. AIWMI works with key industry participants’ viz. the Government, the Regulators, the Industries/Associations, the Corporate, the Media and the General Public to achieve its objectives. Besides enhancing technical competence and professionalism in the industry, AIWMI organizes events and facilitates discussions to promote best practices in leadership and talent development in the financial sector with an aim to become Asia’s premier center of excellence for financial education.

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