Accounting rules “practically impossible to implement”, Barclays claims

Proposed banking rules, born out of the crisis, will be “practically
impossible to implement” and encourage “boilerplate” disclosures, according to

Barclays’ finance director Chris Lucas is the latest to voice opposition to
the accounting rules, which may force banks to calculate and disclose the
proportion of loans which will turn bad.

The bank wants the proposals redesigned and re-exposed citing practical
challenges in implementing the model.

“Many of then proposals are too prescriptive and practically impossible to
implement,” Lucas said in Barclays’ submission to the International Accounting
Standards Board (IASB), which is considering the proposals.

The proposals will move banks away from the current model, known as the
incurred-loss model, which forces banks to record a loss if there is a “trigger”
– an observable event which casts doubt on whether a loan will be honoured. A
payment default is often referred to as an example.

Under the proposed rules, known as the expected-loss model, banks would
reassess the health of their loan portfolios at least each year, then downgrade
profits if they “expect” a loan might not be paid. All future cash flows would
be calculated on day one of the loan’s life and banks’ profits would be adjusted
to reflect the “expected losses”.

Barclays argues the expectations would be judgmental, complicated, and may
end up increasing volatility in bank accounts.

“The sensitivity disclosures…are highly subjective, difficult to interpret,
and potentially misleading, particularly when the underlying data is itself
highly subjective,” Lucas said.

“It is hard to see how sensitivity disclosures could be aggregated by a large
institution to provide succinct data that avoids ‘boilerplate’ disclosure.”

Last week RBS also voiced its opposition to the rules describing the
proposals as “unnecessarily complex, operationally challenging and [requiring]
substantial systems cost”.

The IASB proposed the new model in November, urged on by G20 leaders aiming
to reform banking rules in the wake of the crisis. At the time regulators argued
current accounting rules enabled banks to book profits from loans they could
reasonably expect might go bad.

Banks are urging the IASB to consider alternative proposals being drawn up by
the Basel Committee on Banking Supervision or the IASB’s US counterpart, the
Financial Accounting Standards Boards.

Last week, Accountancy Age reported the new rules would cost the largest
banks almost £40m each and require a root and branch overhaul of their systems.
The aggregate cost for banks including HSBC, NatWest, RBS, Barclays, Lloyds and
Santander, could be as high as £225m.

Further reading:

rules may cost largest banks £37m each

chief speaks out on loan-loss provisions

Related reading

Fiona Westwood of Smith and Williamson.