Bank of Scotland chief warns fair value could lead to recession

Former Bank of Scotland CE Sir Peter Burt has called on the Bank of England to relax rules on how banks account for their assets on the balance sheet, in the face of mark-to-market or fair value accounting rules which could see these booked below their value, amidst a volatile market.

Sir Peter is the latest senior figure to add his voice to the growing revolt against mark-to-market pricing, warning over the weekend that the credit market freeze is so serious that Britain could slump into recession, the Sunday Telegraph reported.

'To the proverbial visitor from Mars, the problem and its solution might seem clear. In the past week, I have been told by senior bankers and customers of having mark down assets of undoubted value. No bank will lend or invest if, by doing so, they have to take an immediate write down as a result of being required to mark the asset to an unrealistic market price,' Sir Peter said.

'With an increasingly severe contraction of credit – likely to be exacerbated if Northern Rock actually does manage to repay £24bn to the Government in the next year - and with interest rates stuck stubbornly above base rate, the UK is facing an increasing risk of a slowdown turning into a recession,' he added.

If rules were relaxed, lenders would be relieved of some of the strain and could be encouraged to lend to each other and customers.

However accounting regulations require banks to 'fair value' assets.

But the rules have been criticised for not making sense in the current market turmoil because there is no market for quality assets and banks are forced to take inappropriately heavy write-downs.

Further reading:

Credit crunch sparks fair value revolt

SEC tells companies to lift lid off fair value

King to get tough on banks' balance sheets