Financial reporting watchdog and investors back 'economic reserve cycle' plan

The Financial Reporting Council, investors and top accounting firms have
backed
the idea of an ‘economic cycle reserve’ to bolster bank balance sheets, as
proposed in yesterday’s Turner review.

But the group – which includes the Big Four accounting firms, the Association
of British Insurers and the CBI — has called for the proposed ‘rainy day’
provisions to be introduced in a way that avoids hitting banks’ reported
profits.

Under the proposed economic cycle reserve banks would have to set aside
capital reserves in the good times to protect themselves for when they hit
financial difficulties, thereby reducing the risk that they will go bust.

However, if the money set aside is taken as a charge in the company’s profit
and loss accounts, reported profits will dip. This would risk confusing
investors and generating negative headlines in the media, the FRC fears.

Instead, the FRC wants banks to ‘ringfence’ their reserves and disclose them
in their balance sheets, next to items such as share capital.

‘We are asking [banks] to set up a rainy day fund and to change the behaviour
of directors in the good times to make them more cautious about dividends and
buybacks, said FRC director of corporate reporting, Ian Wright.

He added that he hoped that the ‘economic cycle reserve’ proposal would get
international support at the next month’s G20 meeting of world leaders in
London.

The FRC group first proposed the idea of an economic reserve cycle earlier
this year.