Banks could face costly rule change to help prevent crisis

Mar 8, 2013

Financial institutions could be forced to 'come clean' on losses but critics say change won't be a 'panacea'

BANKS could be forced to raise billions of pounds in fresh capital under proposed changes to the rules over how they account for assets. In a move intended to make the financial system less prone to a crisis, the International Accounting Standards Board (IASB) is proposing a major change in regulations to force banks to declare their losses earlier, reports the Daily Telegraph.

Currently banks only need to recognise a loss if it happens or if they believe it will go over a certain threshold. Under the "expected loss" rule change, lenders would have to recognise all the losses they could incur once there is evidence of any decrease in the value of a loan.

For years, senior regulators including Sir Mervyn King have called for banks to come clean over the full scale of the losses on their balance sheets and IASB chairman Hans Hoogervorst told Bloomberg the change would "avoid excessive front-loading of losses".

But as Tony Clifford, an international accounting specialist at Ernst & Young, told the Telegraph, the proposed rules would be the single biggest change in accounting the banks have ever had to deal with.

There is also disappointment that the IASB, which regulates in Europe, could not work jointly with its American counterpart, the Financial Standards Accounting Board (FSAB), in agreeing rule changes. Both bodies have released similar proposals but the FSAB's version, released in December 2012, requires any expected loss from a loan to be recognised immediately, the Economist notes.

Nigel Sleigh-Johnson, the head of financial reporting at the Institute of Chartered Accountants for England and Wales, warned the IASB's changes will not be a "panacea".

He said it may do little to improve the transparency of financial institutions and could lead to more instability in bank's results as well as creative accounting techniques. "There are potential pitfalls linked to any model including expected loss models; the proposals could, for example, increase the potential for profit-smoothing [adjusting takings over different periods to manage investor expectations]", he said.

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