How should banks account for loan losses [An article from: Journal of Accounting and Public Policy]

This digital document is a journal article from Journal of Accounting and Public Policy, published by Elsevier in 2005. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
Existing GAAP treatment of banks' loan losses follows the treatment of other contingencies. Bank supervisors expect reserves to at least cover expected losses. The FASB's goal is to move to fair value accounting. We find that the book value of loans before deducting the loss allowance generally understates their value, suggesting that the bank supervisors are excessively conservative. We further find that fair value is not verifiable for many loans because of adverse selection risk. We recommend that the allowance be limited to: (1) losses which could have been charged off but were not, and (2) large losses when the economic value is less than the book value of a loan portfolio.