Although new international accounting standards will initially raise costs and dent net income for banks, the rules will also help banks deal with loan losses amid an economic downturn, according to a new report from Moody’s Investors Service Inc.
The credit-rating agency says that the implementation of the new accounting rules will initially reduce banks’ tangible common equity (TCE) ratios by around 50-60 basis points in 2018, but that the rules will ultimately bolster banks’ ability to weather loan losses, as the Moody’s report estimates that banks’ reserves will rise by almost 30% under the new treatment.
“Once IFRS 9 rules are implemented, credit costs for banks will be marginally higher and net income marginally lower, assuming that the economy is growing at trend and asset quality is broadly stable,” says Colin Ellis, managing director at Moody’s, in a statement. “During a cyclical downturn, the new rules will make banks increase their reserves and coverage ratio before problem loans peak.”
Moody’s reports that its simulations to examine the impact of a recession and slow recovery finds that, “In a downturn, banking metrics would be hit earlier but improve faster, supporting the economic recovery.”