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Allowances for loan losses surge in the US

The US saw a 106.1% year-on-year increase in money set aside in case of bad loans, according to The Banker's Top 1000 World Banks ranking.
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The Covid-19 pandemic has undoubtedly had a major impact on banks’ profitability this year, with only a minority of institutions appearing to be immune to its effects. One of the most obvious impacts is visible in the allowances for loan losses that many banks have had to set aside in anticipation of souring loans caused by the widespread and persistent economic disruption witnessed across the globe.

At an aggregate global level, an additional $352bn has been set aside in allowances for loan losses (held as contra assets on banks’ balance sheets), an increase of 26% compared to 2020.

However, the picture varies considerably by region. In North America, for example, the amount set aside in allowances for loan losses has more than doubled since 2020, whereas in Asia-Pacific it is up by a more modest 25%; 22% in Africa and the Middle East; and just 17% in Europe, according to The Banker’s 2021 Top 1000 World Banks ranking.

The three countries with the largest year-on-year increases in allowances for loan losses are the US (106.1%), the Philippines (98.5%) and Indonesia (89.9%).

A possible explanation for the US’s higher figures is in accounting rules. Since the start of 2020, US banks have had to adhere to the US Financial Accounting Standards Board-mandated current expected credit losses accounting standard. This is a significant development, as it means that US banks must effectively front-load their response to expected losses that may occur at any time during the life of the loan.

The majority of other jurisdictions operate under International Financial Reporting Standards 9 rules, which include a tiered approach on when and how to account for expected credit losses depending on what stage of credit risk or credit impairment a financial asset is judged to be at. In effect, this means the figures for US banks may be somewhat amplified when compared to international peers, and vice versa.

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