It is essential that bad assets be removed from bank balance sheets as soon as possible, Boston Federal Reserve Bank President Eric Rosengren said Monday. Speaking at the Institute of International Bankers Annual Washington Conference in D.C., Rosengren warned that failure to restore capitalization to banks could exacerbate problems with credit availability.
Rosengren looked to lessons learned from the Japanese financial crisis in the early 1990s, applying them to the current meltdown of the U.S. financial system. He noted that problems with credit have to do with the inability to supply credit, not just differences in demand for credit. Allowing banks that are poorly capitalized to continue operations without sufficient capital is likely to make the credit crisis worse, Rosengren warned.
"Evidence from Japan and previous problems in the U.S. indicates that allowing poorly capitalized banks to continue operations with insufficient capital is likely to exacerbate problems with credit availability," he said in prepared remarks.
In addition, he warned that certain bank-regulatory and accounting practices are procyclical, and can keep the system in crisis mode for a longer period of time.
For example, Rosengren noted that assets pledged as collateral against a bank loan, such as a house or vehicle, decline in value, making it more difficult to get a quality loan.
"Declining collateral values generally result in higher loss rates on non-performing loans," he explained. "In terms of accounting, higher loss rates result in larger loan charge-offs and increases in loan loss reserves - which depletes capital and leads banks to reduce lending…in order to maintain capital-to-assets ratios."
Rosengren suggested modification of policies relating to banks loss-loan reserves and how they are calculated to determine capital for financial statements. Specifically, he suggested modification of the current strict adherence to U.S. GAAP accounting principles to determine loss-loan reserves.
The "included loss" model banks follow "provide that a loan-loss reserve should reflect probable and estimable losses that have already been incurred in the loan portfolio, but have not yet been discovered," Rosengren explained.
However, as financial conditions deteriorate, "loan loss reserves lag the increases in nonperforming loans and expected losses," the Boston Fed President continued.
"It has been observed in previous periods of banking problems that loan-loss reserves were low at the beginning of the banking problems, lagged as problems became apparent, and likely to peak at the very time that we could most use bank capital to be at work financing economic recovery," he said.
Rosengren suggested addressing procyclicality through policy change, through accounting or regulatory rules.
Finally, Rosengren noted that another lesson from Japan's crisis is that it is necessary to quickly remove troubled assets from bank balance sheets.
"Banks with troubled assets focus on avoiding further losses and further depleting capital," he explained. "Troubled banks in Japan were often more supportive of problem borrowers than borrowers who had good prospects going forward."
Rosengren suggested that governments are not the best managers of bad assets. Rather, he urged removing the assets and selling banks to new owners.
"When a bank is closed with FDIC support, this is relatively straightforward. The bad assets are removed from the bank and quickly disposed of by the FDIC, and the good assets are sold to an acquirer," he said.
"The new acquirer does not spend time focused on the problems of the past, but rather, focuses on maximizing future profitability," Rosengren added. "This is a reason for moving to resolve, as quickly as possible, banks that are clearly insolvent."
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June 12, 2026 17:14 ET Major central bank action was the focus this week in economic news. The European Central Bank became the first major central bank to move in response to the rising inflationary pressures in the backdrop of the conflict in the Middle East. In North America, the U.S. inflation and trade data as well as Canada’s central bank decision gained attention. The Chinese trade data was the main news in Asia.