written by Tom Beisner

Tom Beisner head shot

This issue is a lot like the Rocky movies.  Just when you think it’s over they make another movie!  In Early March U.S. Comptroller of the Currency, John Dugan said that the accounting rules need to be changed to allow banks to reserve for future losses in the loan portfolio so that earnings would be less volatile. Didn’t we just spend the last 14 years hashing out this issue and finally eliminating any differences?

He made these remarks during the annual meeting of the Institute of International Bankers in Washington.  The Journal of Accountancy published an article on the speech on March 5, 2009.

If I could dig up a speech given by the head of the Office of Thrift Supervision from the mid-80’s it would sound a lot like this speech given last week.  Back in the 80’s accountants had to deal with Regulatory Accounting Principles (RAP) as well as Generally Accepted Accounting Principles (GAAP).  RAP would allow savings and loans to defer losses on their books creating fake capital where GAAP would require them to write them off.  We called this RAAP/GAAP differences.

We all know how the S & L story ended and we shouldn’t repeat those mistakes.  I think it is important to stop discussing how the accounting rules should be changed and focus instead on nursing the banking industry back to health.  Just changing the accounting rules doesn’t change the underlying health of a company.  The issue regarding the proper amount that banks should have reserved today has more to do with appraisal issues surrounding the underlying collateral than accounting rules.  A lot of the collateral is not being traded anymore and in the case of land and development loans, residential lots are not moving as fast as the original appraisals assumed.

It appears the regulators are still confused about the fact that the allowance for loan losses is intended to recognize losses in the loan portfolio today.  Future losses should be accounted for by increasing capital.  To recognize future losses in the allowance for loan loss account because the underlying collateral is hard to value would be taking a step backwards towards eliminating the RAP/GAAP difference in the allowance for loan losses.