Carving out separate IFRS for banks will not prevent systemic shocks
ACCOUNTANTS have come in for good old-fashioned political shellacking over the past two weeks. The denouement came today, when the Big Four were hauled up before Margaret Hodge and the public accounts committee.
Compared to the rough edge of Hodge’s tongue, last week’s appearance before Lord Lawson’s commission on banking standards must have seemed like a walk in the park. Lawson was picking through the wreckage left in the aftermath of the banking collapse and trying to ascertain what role the auditors had in the mess.
But while Hodge’s sights seem firmly set on the skulduggery of accountants advising on dodgy tax planning arrangements, Lawson’s opprobrium kept returning to the failings of IFRS, whether because of an absence of prudence in the IASB’s conceptual framework – the theory that underpins all of its codes and standards – or the much-maligned incurred loss provisioning model.
The standard setter has long since accepted that the backward-looking approach was inherently flawed and is moving towards a forward-looking expected-loss model. It has been suggested that even an expected-loss model could not stem a financial crisis of such magnitude as that of 2008 – the scope of the losses was beyond anyone’s expectation, after all – so it seems natural that Lawson remains concerned about the standards’ ability to prevent more systemic shocks.
However, I don’t agree with Lawson’s suggestion that banks should be subject to some form of IFRS carve-out, whereby banks would face specific rules around accounting for gains and losses. Yes, banks are inherently more complex institutions than your average SME, but I wonder how banks could be subject to a carve-out while othe financial service providers would still report under normal IFRS.
Surely, what is applied to one must be imposed upon the rest. The largest and most complex insurance companies, it can be said, are systemically important. The industry has argued that insurers do not pose the same systemic threats as banks, but in the most extreme cases – take American International Group, for example – the collapse or near-collapse of an insurer can have just as important ramifications.
AIG – at the time the world’s largest insurer – was brought to its knees by losses from its financial products division. Its core business was profitable but suffered, and would have collapsed if not for a US taxpayer bailout to the tune of $180bn, because of a lack of liquidity; the result of a deterioration in the quality of its credit default swap portfolio.
I also agree with the assertion by PwC’s John Hitchins that separating banks could lead to accidential arbitrage that would drive transactions to a shadow banking market. Banks are far from the only institutions conducting transactions of a banking nature.
If banks need separate rules, as Lawson’s questions appeared to drive at, then so should other financial institutions. For instance, insurers currently report outside of IFRS, though work is underway on a planned new IFRS for insurance companies to bring standardisation across their market reporting.
With regulators moving to end the insurane industry’s carve-out, there would be no rhyme or reason to give one to banks.
The principles in the accounting standards are all perfectly applicable to banks. The regulators and standard setters must ensure the current rules are fit for the purpose.
Richard Crump is deputy editor of Accountancy Age & Financial Director
This story has been amended