The Bank of England is backing proposed accounting changes for UK banks despite reluctance from many within the banking industry.
Debate is raging as to whether UK banks should adopt a market-value approach for financial instruments such as bonds, debts and derivatives to give a clearer overview of banks’ accounts.
A spokesman for the British Bankers’ Association said the industry agreed that it was a topic that needed further debate, but recommended that the issue be looked at separately and not as a stepping stone to the development of a standard.
‘Where we possibly diverge from the Bank is that we believe it is better to look at disclosure in its own right rather than as an intermediate step to full fair-value measurement,’ said the spokesman.
The Bank argues in its biannual financial stability review issued ahead of Thursday’s official publication that the mixed model approach is unsustainable in the current environment and is pushing to adopt full fair-value accounting.
A spokeswoman said the Bank was concerned with stimulating debate and discussing the pros and cons of a move to fair-value accounting.
‘The bank sees this as a positive step and something that should be discussed further,’ she said, emphasising, however, that the bank is not looking for rapid change.
The recommendations to adopt full fair-value accounting – an estimate of an exit price determined by market interactions – comes from accounting bodies and banking regulators that claim traditional accounting approaches ‘obscure the real value of securities and derivatives and swaps’.
UK banks have for a number of years been using a mixture of the more traditional approach which is reportedly easy to establish, but now ill-suited to the changing use of financial instruments and fair-value approach for trading activities where they buy and sell securities, derivatives and other instruments.
The BBA, however, disputes the perceived demand for change and claims the move would cause more volatility in the market.
But, the Bank of England says fair-value accounting would be the best way to ensure losses are fully recognised in accounts. The bank cites various examples of how crises such as the US Savings and Loans crisis in the 1980s could have been avoided by using the fair-value accounting approach.
The Joint Working Group, a global standard-setter for financial instruments, plans to submit a draft version to the international standard-setter, IASC, in the last quarter in 2000 with a view to its publication.