U.S. banks' loan loss reserves are lagging behind delinquent loans, and the shortfall is drawing scrutiny to the methodology for calculating this reserve-the Allowance For Loan and Lease Losses (ALLL). Most agree that ALLLs should peak just before delinquencies surge, but historically the opposite has tended to occur. U.S. Comptroller of the Currency John Dugan has called for a new look at the methodology for determining the ALLL. The Treasury Department made a similar recommendation in its white paper, "Financial Regulatory Reform" issued in June 2009.At odds are accountants representing bank regulators, who are concerned about economic cycles and potential mismatches between banks' credit costs and loan revenue and accountants representing standard-setters, who are concerned about theoretical accounting integrity and preventing earnings management.The accounting standard-setters, IASB and FASB, have jointly discussed various approaches to estimating the ALLL and issued a number of Agenda Papers on theoretical issues behind banks' difficulties with current accounting. The main controversy is over the "incurred loss model" and the feasibility of determining precisely when a loan loss occurs.Some believe "fair value," "Spanish provisioning" or "expected loss" may be viable alternatives to the incurred loss model.A.M. Best Co. believes more attention should be focused on risk-especially relative to loan pricing-and the need for meaningful risk data in setting either capital or ALLL levels.


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Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com . CONTACT: A.M. Best Co.AnalystsDiane Goodheart, 908-439-2200, ext. 5649 diane.goodheart@ambest.com orKhanh Vuong, 908-439-2200, ext. 5633 khanh.vuong@ambest.com orPublic RelationsJim Peavy, 908-439-2200, ext. 5644 james.peavy@ambest.com orRachelle Morrow, 908-439-2200, ext. 5378 rachelle.morrow@ambest.com http://www.businesswire.com