Global bank watchdogs in accounting rule talks to limit loan losses

By Jesús Aguado and Huw Jones

MADRID/LONDON (Reuters) - Global regulators discussed on Friday whether to ease an accounting rule to avoid banks facing huge provisions for loans to companies hit by the coronavirus crisis, a source involved in the talks said.

The Basel Committee of banking regulators from the world's main financial centres later confirmed that it held a teleconference to discuss the impact of the coronavirus outbreak on banks.

"Banks and supervisors must remain vigilant in light of the evolving nature of COVID-19 to ensure that the global banking system remains financially and operationally resilient," it said in a statement.

After separate statements from the Bank of England and the European Central Bank on Friday aimed at easing the impact of the accounting rule, Basel made no specific mention of it in its statement, but left the door open to further action.

"In the coming days, the Committee will consider additional measures aimed at supporting the financial resilience of banks... during these unprecedented times," it said.

The rule known as IFRS 9 is mandatory in the 27 state European Union, Britain and more 100 other countries.

"Let's agree to kind of freeze the situation," the source said of the talks. "There is greater concern about potential losses that banks may incur in relation to businesses."

Provisions directly affect a bank's profit and loss calculations and eat into its capital buffers, which would then need topping up in difficult market conditions.

The rule was called for by G20 leaders in the aftermath of the global financial crisis a decade ago. This highlighted how late banks provisioned for souring loans, typically at the point of default, leaving taxpayers to bail out lenders.

Under the International Accounting Standards Board rule, banks have to make some provisioning for expected losses on the first day of the loan. The United States, which has its own standard setter, insists on full provisioning from the start.

The Bank of England, a Basel Committee member, sought on Friday to clarify the application of IFRS 9 during the coronavirus epidemic, saying that its rapid onset meant it was very challenging to make forecasts about expected losses.

If any forecasts are made, they should reflect the temporary nature of the shock and fully take into account the relief measures that Britain's government has taken to help the economy, such as payment holidays for mortgages.

The European Central Bank, also a Basel member, told banks on Friday not to provision too much against souring loans to avoid being pro-cyclical, meaning accentuating market stresses.

"Within its prudential remit, the ECB recommends that all banks avoid procyclical assumptions in their models to determine provisions," the ECB said.

Banks should make use of the transitional rules that were introduced to phase-in IFRS, it added.

(Additional reporting by Francesco Canepa in Frankfurt, editing by Alexander Smith, Ed Osmond, Kirsten Donovan)