By Dwight Cass
FASB and the IASB are slowly refining the standard, but this more realistic accounting approach will hit bank capital—and could cause lenders to pull in their horns even more.
The last time the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) made reportable progress on their financial asset impairment project was before the August 2011 flare-up in the European sovereign debt crisis. Revelations about the extent of European banks’ exposure to dodgy PIIGS debt, and how this has imperiled not only the banks but the euro itself, have cooled some of the enthusiasm for an accounting move that, while perhaps more realistic and useful for investors, will almost certainly squeeze bank capital by requiring more loan-loss provisioning at an earlier stage in an asset’s deterioration.