THIS IS NOT the first time that a separate accounting regime for banks has been suggested. Lord Turner made a similar call at an ICAEW conference in January 2010 and the issue had been debated many times before that.
The dangers of having different accounting for banks are that it would intensify political and industry lobbying on bank reporting, particularly at times of pressure, and that it would set a precedent for every other industry to ask for their own regimes.
It is true that the nature of banks’ balance sheets is different to most other types of business, with larger numbers, higher leverage and financial instruments dominating. Banks’ business models are also different, as all banks can be subject to a run on their funding if confidence collapses. ICAEW agrees that changes need to be made to accounting for financial instruments. Standard setters have been working on this highly complex area for some time, but all proposed treatments are controversial and views on the best approach differ widely.
However, nearly every industry can point to circumstances and complexities that are either unique to that sector or disproportionately affect it. This is why we have not supported the idea when it has been proposed in the past. There is also a danger that requesting a separate regime for banks could look like special pleading at a time when the banks are coming under criticism, and could lead to accusations of trying to be less transparent.
Andy Haldane himself criticised suggestions that accounting should follow business models, in effect suggesting a held to maturity category for assets valued at cost should not be allowed because a bank may hypothetically be unable to fund long dated assets in this way. Aside from a paradox between rejecting the use of business models in accounting but advocating a separate regime for banks, the example runs against the basic principle of going concern.
Finally, Andy Haldane’s objective of providing better information on valuation uncertainty is good. His proposed solution is to provide ranges of valuations, instead of either amortised cost or fair value. While this may be interesting from a financial stability perspective as an economic indicator, it is highly complex and likely to be difficult for investors to understand.
Investor confidence – especially in banks – does need to be restored, and improving financial reporting is a key way to achieve this. But further complication, of the reports or the system as a whole, is not the best way to begin.
Iain Coke is head of the ICAEW’s Financial Services Faculty
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