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ICAEW draws up plans for assurance on banks’ capital

ICAEW is developing a framework for assurance on bank capital measures in response to increased concern over banks’ capital positions, the institute announced today.

The framework is intended to provide a basis for independently examining risk-weighted assets (RWAs), one of the most judgemental parts of calculating a bank’s capital ratio – the key indicator of its ability to absorb losses.

RWAs are currently unaudited, while there is no consistent method for the risk-weight of an asset, which means they may be poorly understood and lack comparability between banks.

Iain Coke, head of ICAEW’s financial services faculty, said the institute is concerned that capital measures are not reliable enough, undermining trust in banks and the financial system.

“If a bank wanted to flatter its market image at present, it is most likely to be through manipulating its RWAs,” Coke said.

“Some of the lack of comparability relates to the amount of subjectivity in the capital rules themselves. However, the controls around the production of RWAs may not be as robust as those around banks’ financial statements. Experiences of LIBOR and FX market abuse show the problems that can happen with weak internal controls.

“We are now seeing less and less trust in capital numbers from investors and more and more calls for assurance on them. Assurance cannot remove the subjectivity from the capital rules but it can significantly improve the quality of controls around their operation.”

A recent thematic review of the quality of bank audits by the FRC found that the audits of two banks and building society required “significant improvements.” The accountancy watchdog published the findings of its review following its criticism of the quality and rigidity of audits in the sector. 

The institute has been discussing the potential for assurance on RWAs with the Prudential Regulation Authority and audit firms and plans to speak to stakeholders, including investors, analysts, audit committees and regulators in early 2015 to develop a proposed standard model for assurance for formal consultation.

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