FSA: Accounting must help avoid another bank crisis

Global accounting standard setters must engage closely with banks to ensure huge economic crises are avoided, said FSA chairman Lord Turner.

In a major speech at the ICAEW's banking conference this morning, Lord Turner said that accounting for loan losses in a banking book and the fair value approach in banks' trading books contribute to procyclicality.

The FSA wants to allow the banking book to reflect a more forward looking approach to loan losses; and to limit the use of fair value accounting in the income statement to the areas of the trading book where it is most appropriate and, in particular, to trading activities in markets likely to remain highly liquid in nearly all circumstances.

“Banks are different because they matter more, because they can do more harm. That’s why we regulate and supervise their businesses but don’t regulate the businesses of retailers or hoteliers or manufacturers. That’s why there is a special relationship with central banks as lender of last resort. That’s why we worry a lot about banks which are too-big-to-fail," said Lord Turner.

“And that’s why prudential regulators, central banks and economic policymakers have a vital interest in the decisions of accounting standard setters in relation to bank accounting standards, which does not apply between regulators and accounting bodies in any other sector of the economy.”

Follow Accountancy Age today for more feedback on Lord Turner's comments.