Banks in revolt over cost of accounting overhaul

A proposed overhaul of bank accounting will cost as much as £225m, take years
to com­plete and do little to prevent a repeat of the factors which brought the
world economy to the brink of collapse.

That is the verdict of banks preparing to fight moves to bring in a new
accounting model aimed at putting a stop to practices seen by regulators as a
key ingredient of the credit crunch.

Behind closed doors banks are already modelling the impact, but estimate it
would require change on a scale not seen since the switch to international
accounting standards in 2005.

The new rules, known as the expected-loss model, would force a bank to record
losses if it changes its expectations about the likelihood of a loan default.

Each year banks would assess and reassess the health of their loans, then
downgrade profits if they “expect” a loan might not be paid.

Future cash flows would be reset and profits downgraded in line with the

The rules would stop banks booking profits from loans they reasonably
expected might not be paid.

Under the current system, banks record losses if there is a “trigger” – an
observable event which casts doubt on whether a loan will be honoured. A payment
default is an oft-quoted example.

Banks say they agree with the spirit of the new measures but not the detail.
They would have to undertake a root and branch reform of their structure to
bring in the new measures.

Under Basel II rules, designed for regulatory purposes, banks are now
required to make one-year loss forecasts. Under the new rules it would be for
the life of a loan. The average UK loan is about 25 years.

Credit risk and accounting arms may also have to merge, and the level of
detail may see banks regularly reass­essing the risks across thousands of
product lines at least once a year.

Critically, the rules may also increase the price of loans. “This is only one
of many costs and the more cost you apply, well, very clearly it
has a bearing on the price and supply of credit,” said Paul Chisnall, executive
director of the British Bankers Association.

He estimates the cost as between £25m and £38m for every large bank, and as
much as £225m for the UK’s six largest banks.

“The method [the IASB] has chosen is one that is hugely complex, hugely
expensive and would take years to implement,” he said.

It’s feared the model would amplify the boom and bust cycle, causing a
“pro-cyclical” fair-value effect.

The IASB’s proposals follow calls from the G20 and Basel Committee on Banking

Consultation on the proposals ends on 30 June.

Further reading:

Exposure Draft and Comment Letters

Related reading

tax dictionary