FSA warns banks not to overstate losses

The FSA today told banks not to overestimate their losses from the sub-prime
collapse in order to appear prudent.

The financial watchdog said that some were urging banks to use stressed
models or otherwise overstate losses.

‘This could lead to reduced market confidence in the accuracy of financial
information,’ the body said in its annual

‘For example, some might favour applying valuation adjustments made for
prudential purposes to financial reporting, or requiring firms’ financial
statements to value assets conservatively on the basis of an assumption of
stressed, rather than normal, market conditions, or loan loss provisions to be
set significantly above losses actually incurred to provide a margin of
prudence,’ it said.

The UK banks report full-year results soon, with writedowns expected as well
as anxious discussions with auditors over valuations.

The banks are struggling to value complex derivatives related to the
sub-prime mortgage collapse due to the market ceasing to operating. The
instruments thus have to be valued according to models rather than market

Further reading:

the FSA document

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