Plan for Credit Card Forgiveness Stumbles

13 Nov Plan for Credit Card Forgiveness Stumbles

The Associated Press is reporting that the Office of the Comptroller of the Currency, the agency with regulatory control over national banks, does not favor the bank plan to forgive up to 40 percent of credit card balances owed by certain borrowers.

The reason for the OCC’s position is that the banks are seeking to defer recognition of credit losses stemming from the proposed debt forgiveness. This would be an impermissible accounting ruse which would misrepresent banks’ financial strength.

Since balance sheets of banks dictate reserve requirements (and therefore permissible leverage), an accounting practice that did not recognize actual credit losses could lead to a further weakening of the banking system. As part of the plan, the banks also sought to defer the income tax due from individuals arising from the debt forgiveness.

It is interesting that banks are seeking a way to forgive some credit card balances. Further developments warrant attention.

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