As the COVID-19 virus continues to spread around the world and emergency confinement measures have disrupted markets, bankers on both sides of the Atlantic have called for a relaxation of accounting standards introduced in the wake of the Great Financial Crisis, known as “expected credit loss provisioning”.
These calls, like much bank lobbying attempting to influence capital regulation, should be ignored by public authorities and accounting standard-setters. There is no perfect accounting “thermometer” for credit risk in banks’ loan books but breaking the current “thermometer” in the midst of a crisis would do far more harm than good.
Thanks to the swift reaction of the European Central Bank (ECB), banks have been granted very significant capital relief giving them the capacity to take on losses that would eat into their capital buffers, as these have been significantly built up over the last decade in application of the global prudential accord known as Basel III.
Banks were never enthusiastic about having to book losses earlier than what previous rules allowed and lobbied heavily against it on both sides of the Atlantic. Such lobbying has now been revived by the coronavirus shock, together with calls for a more general suspension of credit loss provisioning.This is not the time to give banks special favours and research clearly indicates that it is better to book a provision early on, as soon as the loss is foreseeable even if no repayment has been missed yet.
Read the full article on Bruegel.