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Treasury Report Questions FASB’s Credit Loss Standard

A June 12 report by Department of Treasury has recommended overhauling the U.S. financial regulatory system. While most of the overhaul focuses on easing bank requirements such as those from the Dodd-Frank Act, it also questions the need for the Financial Accounting Standards Board’s (“FASB”) credit loss standard.

In response to the 2008 global financial crisis, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard addresses delayed disclosure of problematic loans that appeared healthy on banks’ balance sheets, but their loan portfolios became more troubling. The issue is seen as one of the top accounting issues that led to the crisis.

In its review of the credit loss standard, the Department of Treasury said it is uncertain whether changes are necessary to improve the U.S. banking system. The report also suggests bank costs could rise since the standard calls for loss reserves to be stashed away earlier in the business cycle.

Ordered by the White House in February, the approximately 150-page report is the first of several reports regarding the country’s financial regulatory system. The Treasury Department will also issue reports on capital markets regulation, the asset management and insurance sectors, and nonbank financial organizations.

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