Comments on: Loan Loss Accounting http://fasri.net/index.php/2010/01/loan-loss-accounting/ Informing FASB Deliberations Through Academic Research Thu, 09 Sep 2010 17:51:37 -0400 http://wordpress.org/?v=2.8.5 hourly 1 By: Scott Taub http://fasri.net/index.php/2010/01/loan-loss-accounting/comment-page-1/#comment-5821 Scott Taub Thu, 21 Jan 2010 20:17:59 +0000 http://fasri.net/?p=2009#comment-5821 What I think they are really doing is booking loss losses based on budget, with budget anticipating things like incurred losses, future losses, future lending, recoveries, industry averages, capital requirements, and a whole lot of other things. Then at year end they analyze the current portfolio to ensure that where they ended up by booking the budget is not unreasonable. What I think they are really doing is booking loss losses based on budget, with budget anticipating things like incurred losses, future losses, future lending, recoveries, industry averages, capital requirements, and a whole lot of other things. Then at year end they analyze the current portfolio to ensure that where they ended up by booking the budget is not unreasonable.

]]> By: Cathy Shakespeare http://fasri.net/index.php/2010/01/loan-loss-accounting/comment-page-1/#comment-5820 Cathy Shakespeare Thu, 21 Jan 2010 20:08:46 +0000 http://fasri.net/?p=2009#comment-5820 So how do the banks currently do expected losses? Do we get some day 1 losses or are they applying something closer to what you are describing? So how do the banks currently do expected losses? Do we get some day 1 losses or are they applying something closer to what you are describing?

]]> By: Scott Taub http://fasri.net/index.php/2010/01/loan-loss-accounting/comment-page-1/#comment-5812 Scott Taub Wed, 20 Jan 2010 23:09:40 +0000 http://fasri.net/?p=2009#comment-5812 I don't know of any entity(other than investment companies and broker dealers) that values loans at fair value -- by taking advantage of the fair value option. As for moving away from the incurred loss model, my experience suggests that many banks have already moved away from it, without admitting it. However, every previous attempt to buy into GAAP an expected loss model has failed, and the one the boards have been discussing seems remarkably complex to me. The problem is that a certain amount of losses are expected in any loan, and we don't want immediate loss recognition every time a loan is made. Conceptually, we probably want the effects on valuation of changes in loss estimates from the estimates that were used in pricing the loan to be recognized when those estimates change, and we want losses estimated in the pricing of the loan to be recognized over the loan term. Easy to explain, perhaps, but not easy to do. I don’t know of any entity(other than investment companies and broker dealers) that values loans at fair value — by taking advantage of the fair value option.

As for moving away from the incurred loss model, my experience suggests that many banks have already moved away from it, without admitting it. However, every previous attempt to buy into GAAP an expected loss model has failed, and the one the boards have been discussing seems remarkably complex to me. The problem is that a certain amount of losses are expected in any loan, and we don’t want immediate loss recognition every time a loan is made. Conceptually, we probably want the effects on valuation of changes in loss estimates from the estimates that were used in pricing the loan to be recognized when those estimates change, and we want losses estimated in the pricing of the loan to be recognized over the loan term. Easy to explain, perhaps, but not easy to do.

]]> By: Robert Bloomfield http://fasri.net/index.php/2010/01/loan-loss-accounting/comment-page-1/#comment-5804 Robert Bloomfield Tue, 19 Jan 2010 23:47:20 +0000 http://fasri.net/?p=2009#comment-5804 Firms <em> could </em> use the fair value option for their loans receivable and thereby provide more timely information about expected collections, right? Is there much evidence yet on how common this is? I have heard hardly anyone does it, but that is anecdotal evidence. Firms could use the fair value option for their loans receivable and thereby provide more timely information about expected collections, right? Is there much evidence yet on how common this is? I have heard hardly anyone does it, but that is anecdotal evidence.

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