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The Government should now adopt my bill on bank accounting

Accounting seems so dreary but what if broken rules allow banks to show false profits, overstate capital and hide losses? What if the banks have paid bonuses out of unrealised gains? The Bill I introduced in March 2011 deals with just those problems. All the details are here. I learnt today that the Bank of England will make a statement on Thursday about bank balance sheets. I expect they will require assets to be written down and more capital to […]

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Bank’s risk management affected by IFRS accounting

Since I introduced a measure criticising IFRS accounting and requiring banks to prepare accounts to UK standards, there have been a stream of developments backing up my criticisms. The problem extends as far as Korea. Via bruegel.org: Korean firms’ business activities, such as risk management and foreign investment, have been affected by the obligation since 2011 to adopt International Financial Reporting Standards (IFRS). Korean banks may need to reshape their credit-rating models and enhance their loan-collection systems to prepare for […]

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Two simple steps to transform the culture of banking and to forestall the next outrage

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It’s time to privatise commercial risk in banking and insist on prudent accounts. Government should: Eliminate moral hazard from the financial system by implementing this measure to make bank directors strictly liable without limit and to treat as capital both directors’ personal bonds and, for five years, the bonus pool. Introduce prudent bank accounting so banks can’t game the rules using derivatives to manufacture illusory profits from unrealised cash flows. The banking system isn’t capitalist It’s not capitalism when private individuals […]

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Banks: gaming the rules to generate illusory profits

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As I prepared an article on how banks generate illusory profits and artificial levels of capital by gaming the rules, I rediscovered this limerick in Gordon Kerr’s related paper, The Law of Opposites: There was a young man from Darjeeling Who got on a bus marked “To Ealing” The sign on the door Said “Don’t spit on the Floor” So he lay back and spat on the ceiling Here’s a great metaphor from the book, which explains how the rules […]

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IFRS accounting appears to allow Barclays to double stated profit

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It has been brought to my attention by PIRC that Barclays are leaving £2 billion of bonuses out of their accounts within IFRS rules. Taken together with another flaw in IFRS, it appears that Barclay’s true profit is about half that allowed under the rules. Via the PIRC site: Barclays is still leaving bonuses of more than £2.0bn out of its accounts, nearly three times the dividend for 2011 (£730m), according to analysis by PIRC. PIRC research last year identified that at […]

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Three flaws in the Financial Services Bill

Under the heading, Osborne looks to limit damage of ‘credit busts’, the FT gives a neat summary of the Chancellor’s plans. In particular: He said the FPC would also look out for dangerous linkages in the financial system and identify exotic new instruments that might undermine stability. It would be charged with containing credit booms as well as limiting the damage of “credit busts”. Which this morning caused me to regret that I was not given time in the Commons […]

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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 […]

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How banks unjustly inflate profits, boost capital and pay unearned bonuses

Yesterday in Parliament, I chaired an event with Gordon Kerr, launching his report The Law of Opposites, which is covered in the Guardian today: Banks use accounting loopholes to inflate their profits and bolster staff bonuses, according to a report published on Wednesday that calls for changes to the international accounting rules. According to the paper by the Adam Smith Institute, banks are able to use complex financial products such as credit default swaps to report profits that they might […]

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We won’t achieve financial stability under IFRS

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 […]

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Bank warns lenders over bad loans – FT.com

As I have been saying about IFRS: The FPC said it was most concerned that banks had not set aside adequate provisions for this potential new crop of troubled loans. “If provisioning is inadequate, banks’ reported profits and levels of capital may provide a misleading picture of their financial health,” said Sir Mervyn King, Bank governor and chairman of the FPC. via Bank warns lenders over bad loans – FT.com. In the lastest Financial Stability Report, the Bank of England […]

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