Lord Lawson condems the present accounting regime for banks

In the Irish Times:

ON JANUARY 1st 2005 the European Union imposed accounting rules on Irish banks containing a significant but simple flaw that had an impact on the fatal decision by the Irish government in 2008 to give Irish banks a blanket guarantee.

via Bad loans were legally hidden as Lenihan made pledge. And writing in the FT, Lord Lawson says:

The auditing of banks’ accounts, however, is fundamentally flawed in itself. The IFRS accounting system itself has proved to be damagingly pro-cyclical, and the ability to pay genuine (and genuinely large) bonuses out of purely paper profits, which are never subsequently realised, is at the heart of both the bonuses that cause such public and political outrage, and the reason why bank management consistently does so well when bank shareholders do so badly.

With these in mind and following Andy Haldane’s recent speech, I begin to think real progress might be made on this poisonous aspect of the banking crisis.

For more, see The law of opposites: Illusory profits in the financial sector by Cobden Partners’ Gordon Kerr. My related Bill is here.

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