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:
Mr Haldane argued that “fair value” accounting systems, like the current International Financial Reporting Standards (IFRS), had contributed to other crises including the Wall Street Crash and Great Depression.
He said: “Accounting rules in general, and fair value principles in particular, appear to have played a role in both over-egging the financial upswing and elongating the financial downswing. They have tended to over-emphasise return in the boom and under-emphasise risk in the bust.”
The rules have even hampered auditors’ abilities to determined whether a bank is bust. By failing to properly expose bank real liabilities, the system has made “assessments of going concern’ by the auditing profession problematic,” said Mr Haldane.
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.