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
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.”

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