A proposed new rule on bank reserves represents progress over its predecessor, but still has major problems, say former Federal Reserve Chairman Paul Volcker and former Comptroller of the Currency Eugene Ludwig.
“The Financial Accounting Standards Board [FASB] finished 2012 on a high note, issuing a draft new rule to change the way banks build reserves against loan losses,” they write in The Wall Street Journal.
“It is a major step forward. Still, FASB's proposed rule is flawed, and cannot achieve the international consistency that is desirable.”
Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown
Under the old rule, banks had to create reserves only for losses already incurred. “This all but ensures that banks' rainy day funds will be too skinny, particularly in periods when credit markets are under stress,” Volcker and Ludwig write.
The new rule would increase reserves to reflect losses that are expected over the life of the loan.
That’s great, they say.
But loan losses estimates will be determined by what accountants deem an “acceptable” model.
“Modeling by its very nature is backward looking,” the pair state. So the rule “would discourage them [bankers] from acting on forward-looking but less well-defined risks.”
While that’s not the only bank regulatory issue that remains unresolved, many analysts are bullish on banks stocks.
Jeff Tomasulo, managing partner at Belpointe Alternative Investments, says the industry’s giants are benefiting from their staff cutbacks. “These firms are getting learner and … meaner,” he tells Newsmax TV in an exclusive interview.
Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown
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