Accounting doctrine and the accounting profession encroached on the process banks used in making decisions about credit and contributed to the lending crisis, according to Tim Long, senior deputy comptroller for bank supervision policy and chief national bank examiner. In remarks delivered at this week's AICPA National Conference on Banks and Savings Institutions, Long said accounting issues got in the way of judgments that should have been made "by the people best able to speak to the bank's overall credit risk exposure: its senior managers and its credit administration and credit risk professionals, with oversight by its prudential supervisors."
Long blamed the accounting intrusion on the inability of banks to build adequate reserves when loans started going sour in large numbers. The decisions were often made on an accounting approach in what he said should have been a process of credit estimation, based on credit administration inputs.
He admitted some bankers he supervises did a poor job of documenting the reasons they felt their institutions needed higher reserves. But he added, 'I think some in the bank accounting profession placed too much reliance on the lack of historical loss rates and missed the resulting build up of credit risk on the banks' balance sheet.'
Going into the recession banks had historically low reserve levels, but Long said examiners pushing for higher reserves found accounting rules in their way and the application of those rules limited banks' ability to build reserves to meet easily anticipated losses. Long said this stemmed from a rigid adherence to the incurred loss model, a view that he said was also that of the Financial Stability Board's Working Group on Provisioning.
"I believe we have made the provisioning for loan losses much too complicated for the industry, for our examiners, and for auditors," Long continued. "Whether we adopt the expected loss model or something else, we need to get back to a fundamental understanding about the loan loss reserve and what it's meant to represent."
With the economy improving banks are under pressure from auditors to reduce reserves. However, Long believes that is premature.
Bob Scott has provided information to the tax and accounting community since 1991, first as technology editor of Accounting Today, and from 1997 through 2009 as editor of its sister publication, Accounting Technology. He is known throughout the industry for his depth of knowledge and for his high journalistic standards. Scott has made frequent appearances as a speaker, moderator and panelist and events serving tax and accounting professionals. He has a strong background in computer journalism as an editor with two former trade publications, Computer+Software News and MIS Week and spent several years with weekly and daily newspapers in Morris County New Jersey prior to that. A graduate of Indiana University with a degree in journalism, Bob is a native of Madison, Ind
