THE BANK of England’s executive director for financial stability has called for changes to made to the fair value accounting regime used by banks.
In a speech made to the Institute of Chartered Accountants in England and Wales (ICAEW), Andrew Haldane said that accounting rules for banks “have not stood the test of time”, adding that better recognition of the uncertainties associated with bank assets and liabilities would make for a more “durable accounting regime”.
“Accounting rules in general, and fair value principles in particular, appear to have played a role in both over-egging the financial upswing and elongating the financial downswing. They have tended to over-emphasise return in the boom and under-emphasise risk in the bust. That is not a prudent approach,” Haldane said.
Haldane argued that a revised accounting regime for banks should recognise the difference between bank and non-bank balance sheets, with a focus on the valuation uncertainty associated with assets and maturity mismatch associated with liabilities.
According to Haldane, banks’ asset portfolios are more complex and that the risks and uncertainties around the valuation of bank assets are fundamentally different than for non-financial companies.
“It is…precisely these differences that justify separate regulatory and resolution regimes for banks,” he said.
Ian Coke, head of ICAEW’s financial services faculty, agreed that changes need to be made to accounting for financial instruments but warned that creating a separate accounting regime for banks would set a precedent for other industries to ask for their own regime.
“There is also a danger that it could look like special pleading at a time when banks are coming under criticism, and could open the banks to accusations of trying to be less transparent,” Coke said.
“Andy Haldane’s proposal for disclosing valuation ranges is complex and potentially difficult for readers to understand.”
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