We are all suspects now.

The Bank of England’s Executive Director Financial Stability, Andy Haldane, has set out the case for banks to be held to different accounting standards because the existing rules have may allowed banks to overstate their profits and exacerbate their losses. This is something I covered in a private members’ bill last year, with particular reference to derivatives.

As reported in the Guardian:

Accounting rules for banks have bent with the financial stability wind in ways which have amplified investor and regulatory uncertainty. To lean against the prevailing wind, accounting rules for banks may need to recognise more explicitly their differences…It is, after all, precisely these differences that justify separate regulatory and resolution regimes for banks. A distinct accounting regime for banks would be a radical departure from the past. But if we are to restore investor faith in banking sector balance sheets, nothing less than a radical rethink may be required.

And via The Telegraph:

and:

In December, I chaired an event with Gordon Kerr, launching his report The Law of Opposites, which showed that banks use accounting loopholes to inflate their profits and bolster staff bonuses. In response to Mr Haldane’s recent comments on the reform of accounting rules, Gordon said:

Andy Haldane is right that fair value accounting is being used by bankers to game taxpayer bailout funds. My recent report “The Law of Opposites”  supports this view, highlighting how RBS in particular paid staff “profit based bonuses” when the bank was in fact loss making under UK Company Law.  

But Mr Haldane deserves particular congratulations for having the courage to put his name and reputation behind this.  HM Treasury, the FSA and UKFI have stood passively by and watched the health of the bailed out RBS and LloydsHBOS deteriorate whilst their senior employees work on plundering, this month, bailout funds.  The prevalence of accounting devices such as underprovisioning for expected losses, booking profits based on the fall in value of banks’ own debt, and failing to deduct from profits and capital deferred but promised bonuses, exposes the abject failure, post bailout, of state regulation of the banking sector.

This kind of crony capitalism at taxpayer expense must be brought to an end through the reform of our institutions. One of those institutions in desperate need of reform is accounting, dry as that may seem. The Government should now make progress in this direction.

Via Hansard:

Steve Baker (Wycombe) (Con): Chapter 3 of the Government’s report, on loss absorbency, seems, perhaps reasonably, to take for granted the adequacy of accounting standards. I press the Chancellor in his forthcoming White Paper to consider seriously the pernicious effects of the international financial reporting standards, which were applied to banks by the previous Government.

Mr Osborne: There is a debate to be had about international accounting rules and their impact on the financial crisis, which I am happy to have with my hon. Friend in person. There are moves afoot to make the international bodies that set the standards more accountable by using the Financial Stability Board. He raises a good issue.

For more on my reasons for asking, see The law of opposites: Illusory profits in the financial sector:

Accurate accounting is at the root of the legal and scrutiny framework; without accurate accounts basic laws are incapable of enforcement. This report argues that international accounting rules have given the impression of illusory profits on bank balance sheets, inflating bonuses and creating perverse incentives for banks to act recklessly.

I spoke by Skype link to the Local Authority Pension Fund Forum this afternoon on a panel about the International Financial Reporting Standard and its faults. The LAPFF has just published a report which critiques the Standard as a key contributor to the financial crisis.

I first met IFRS in a technical capacity when working as a software consultant. It struck me then as suffering from being the product of a committee without years of evolution behind it. It seems I underestimated its side effects.

The key problem is this: IFRS is backward looking. It allows poor loan loss provisioning or even prevents it. It allows unrealised gains to be recorded as profits. Assets are not recorded at the lower of historic cost and net realisable value. IFRS accounts therefore do not represent the economic or commercial substance of firms’ positions. Loss-making businesses may appear profitable. Hence banks went, in a trice, from seeming solvent on paper to needing bailouts.

Now, the Bank of England Financial Stability report came out today. The Governor made some remarks about the state of banks’ capital and the need for more as a precaution. If my colleagues are right and one cannot tell from IFRS accounts whether or not a firm is a going concern, then the Bank’s report and the Governor’s remarks may be badly wrong: they may have been misled by IFRS accounting.

With this in mind, it seems likely that we won’t achieve financial stability under IFRS.

My Bill would require parallel prudent accounts compliant with the Companies Act from banks. That would reveal a true and fair view of their position and the UK could do it.

A problem is this: I am not convinced anyone wants to know.

From a magnificent article by Philipp Bagus – Why Is There a Euro Crisis?

Today’s banks are not free-market institutions. They live in a symbiosis with governments that they are financing. The banks’ survival depends on privileges and government interventions. Such an intervention explains the unusual stock gains. On Wednesday night, an EU summit had limited the losses that European banks will take for financing the irresponsible Greek government to 50 percent. Moreover, the summit showed that the European political elite is willing to keep the game going and continue to bail out the government of Greece and other peripheral countries. Everyone who receives money from the Greek government benefits from the bailout: Greek public employees, pensioners, unemployed, subsidized sectors, Greek banks — but also French and German banks.

Europeans politicians want the euro to survive. For it to do so, they think that they have to rescue irresponsible governments with public money. Banks are the main creditors of such governments. Thus, bank stocks soared.

The spending mess goes in a circle. Banks have financed irresponsible governments such as that of Greece. Now the Greek government partially defaults. As a consequence, European governments rescue banks by bailing them out directly or by giving loans to the Greek government. Banks can then continue to finance governments (the loans to the Greek government and others). But who, in the end, is really paying for this whole mess? That is the end of our story. Let us begin with the origin that coincides with beneficiaries of the last EU summit: the banking system.

The vast majority of commentary — particularly this week’s extremely disappointing Economist magazine — crassly neglects the tight nexus between banks and the state which has funded politician’s unrealistic promises for a generation through currency debasement. It’s good to see Philipp Bagus — a German economist working in Spain — making a case which is sadly lacking elsewhere.

I am delighted that today I was relected Chair of the All-Party Parliamentary Group on Economics, Money and Banking.  Mark Garnier MP continues as Vice Chair and Alun Cairns MP has agreed to be Secretary.

I founded the Group to provide a forum through which diverse ideas on economics, money and banking could be introduced into Parliament. Our events have included:

• A panel discussion on Britain’s Trillion Pound Horror Story.
• A panel discussion with Andrew Lilico and Tim Congdon.
• A discussion of the Future of Political Economy, with Dr Mark Pennington, Jessie Norman MP and Richard Murphy.
• The Parliamentary launch of Detlev Schlichter’s Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown

Our next event, with Positive Money, will be on 8 November.

I am grateful to all those Parliamentarians, think tanks and members of the public who have supported the APPG. I will be announcing new supporters over the next few weeks, as we launch the programme for the coming year.