Er, tell me where I am in the cycle, says the FSA

Actually, the headline to this blog is not entirely true. The FSA didn’t say that. But I did want to raise an issue about the report from Adair Turner, chairman of the FSA and evangelist for sorting out the regulation of banks, published yesterday.
It’s this: Turner says one way to improve regulation is for banks to set aside an Economic Cycle Reserve so that they have capital in case things go bad like they did so spectacularly not so long ago.
Turner suggests such a reserve would have to go on the balance sheet, but then hints it should also appear on the P&L (this one is up for debate, it didn’t seem like a prescription as I read the report). This way profits, and earnings per share, can be calculated after the reserve has been accounted for, thus producing a much more realistic, perhaps less ‘irrational’ number for bonuses to be calculated with.
Trouble is this – if you have to make a reserve based on where you are in the economic cycle, how do you work out where you are in said economic cycle and how much to reserve?
And, if you are never really sure about the position, or, therefore, whether you’ve made the correct reserve, how would you know if there accounts are right?
This one, it seems to me, will run and run.

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