Banks could face costly rule change to help prevent crisis
Financial institutions could be forced to 'come clean' on losses but critics say change won't be a 'panacea'
BANKS could be forced to raise billions of pounds in fresh capital under proposed changes to the rules over how they account for assets. In a move intended to make the financial system less prone to a crisis, the International Accounting Standards Board (IASB) is proposing a major change in regulations to force banks to declare their losses earlier, reports the Daily Telegraph.
Currently banks only need to recognise a loss if it happens or if they believe it will go over a certain threshold. Under the "expected loss" rule change, lenders would have to recognise all the losses they could incur once there is evidence of any decrease in the value of a loan.
For years, senior regulators including Sir Mervyn King have called for banks to come clean over the full scale of the losses on their balance sheets and IASB chairman Hans Hoogervorst told Bloomberg the change would "avoid excessive front-loading of losses".
Subscribe to The Week
Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.
Sign up for The Week's Free Newsletters
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
But as Tony Clifford, an international accounting specialist at Ernst & Young, told the Telegraph, the proposed rules would be the single biggest change in accounting the banks have ever had to deal with.
There is also disappointment that the IASB, which regulates in Europe, could not work jointly with its American counterpart, the Financial Standards Accounting Board (FSAB), in agreeing rule changes. Both bodies have released similar proposals but the FSAB's version, released in December 2012, requires any expected loss from a loan to be recognised immediately, the Economist notes.
Nigel Sleigh-Johnson, the head of financial reporting at the Institute of Chartered Accountants for England and Wales, warned the IASB's changes will not be a "panacea".
He said it may do little to improve the transparency of financial institutions and could lead to more instability in bank's results as well as creative accounting techniques. "There are potential pitfalls linked to any model including expected loss models; the proposals could, for example, increase the potential for profit-smoothing [adjusting takings over different periods to manage investor expectations]", he said.
Sign up for Today's Best Articles in your inbox
A free daily email with the biggest news stories of the day – and the best features from TheWeek.com
-
Team of bitter rivals
Opinion Will internal tensions tear apart Trump's unlikely alliance?
By Theunis Bates Published
-
6 elegant homes in the Mediterranean style
Feature Featuring an award-winning mansion in Colorado and an Alhambra palace-inspired home in Washington
By The Week Staff Published
-
Harriet Tubman made a general 161 years after raid
Speed Read She was the first woman to oversee an American military action during a time of war
By Peter Weber, The Week US Published
-
Labour shortages: the ‘most urgent problem’ facing the UK economy right now
Speed Read Britain is currently in the grip of an ‘employment crisis’
By The Week Staff Published
-
Will the energy war hurt Europe more than Russia?
Speed Read European Commission proposes a total ban on Russian oil
By The Week Staff Published
-
Will Elon Musk manage to take over Twitter?
Speed Read The world’s richest man has launched a hostile takeover bid worth $43bn
By The Week Staff Last updated
-
Shoppers urged not to buy into dodgy Black Friday deals
Speed Read Consumer watchdog says better prices can be had on most of the so-called bargain offers
By The Week Staff Published
-
Ryanair: readying for departure from London
Speed Read Plans to delist Ryanair from the London Stock Exchange could spell ‘another blow’ to the ‘dwindling’ London market
By The Week Staff Published
-
Out of fashion: Asos ‘curse’ has struck again
Speed Read Share price tumbles following the departure of CEO Nick Beighton
By The Week Staff Published
-
Universal Music’s blockbuster listing: don’t stop me now…
Speed Read Investors are betting heavily that the ‘boom in music streaming’, which has transformed Universal’s fortunes, ‘still has a long way to go’
By The Week Staff Published
-
EasyJet/Wizz: battle for air supremacy
Speed Read ‘Wizz’s cheeky takeover bid will have come as a blow to the corporate ego’
By The Week Staff Published