Advanced Accounting Philosophy: Americans, Europeans Differ on the Existential Question of Bank Losses

When is a loss a loss? That is the question.
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When is a loss a loss? That is the question.

Unfortunately, there appear to be two answers.

Under the proposal by the London-based International Accounting Standards Board, which writes the accounting rules for most countries outside the U.S., banks would book loan losses based on future expectations that the losses will occur. That will speed up the booking of losses -- currently, banks don't record loan losses until there is evidence they have actually happened, an approach that many observers believe led them to be too slow in taking losses during the financial crisis.

The IASB proposal, which was widely expected, spotlights a conflict with the Financial Accounting Standards Board, which writes U.S. accounting rules. The FASB issued a proposal in December that would shift U.S. banks to the expected-loss standard, but the two boards differ on exactly when losses would be booked: If both proposals are approved, U.S. banks could be booking more losses more quickly than their foreign counterparts.

Global Proposal Differs with U.S. on Bank Rules [Dow Jones via Fox Business]

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Have Some European Bank Deleveraging / US Bank Releveraging

I'm back! What'd I miss? Well, that one thing. Also yesterday the BIS put out its quarterly review, which ponders the state of the world financial system, complete with ugly charts* and a cheering story of European bank deleveraging that goes something like this: As deleveraging pressures grew towards the end of 2011, European banks offered for sale a significant volume of assets, notably those with high risk weights or market prices close to holding values. Offerings with high risk weights included low-rated securitised assets, distressed bonds and commercial property and other risky loans. Although some such transactions were completed, others did not go through because the offered prices were below banks’ holding values. Selling at these prices would have generated losses, thus reducing capital and preventing the banks from achieving the intended deleveraging. Thoughts could be thought about that collection of words!