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Hans Hoogervorst, IASB chairman, on Monday said his organisation had little power to prevent a repeat of the toxic loan damage at the heart of the financial crisis.
IASB's mechanism for totting up losses on bad loans has been criticised for allowing banks to ignore the consequences of reckless lending for years and then get swamped by a sudden wave of losses. The IASB and the US accounting standard-setter, the Financial Accounting Standards Board, are nonetheless working on new loan impairment rules based on an “expected loss” model.
Mr Hoogervorst also queried whether the new Basel III banking regulation reform was strict enough. “Under Basel III, a bank is still allowed to be leveraged 33 times. I am not a prudential regulator, but I truly wonder if a bank with leverage of even just 20 times can accommodate a crisis of Spanish or Irish proportions”, he said.
The IASB and FASB rewrite of loan impairment rules is part of a package of key accounting reforms that is now running at least two years late.