BoE Andrew Haldane: Accounting for bank uncertainty

19 December 2011

Remarks by Mr Andrew G Haldane, Executive Director, Financial Stability, Bank of England, at the Information for Better Markets conference.

Fair value accounting principles are under attack from all quarters – accountants, regulators and politicians. The paper by Christian Laux is a welcome attempt to shed some analytical light on this heated debate. It represents a staunch defence of fair value accounting principles, as the least-worst means of measuring and managing financial risk. It makes a compelling case.

Andrew Haldane focuses in his comments on three issues. Linking these issues is the idea that the special characteristics of banks might require a special accounting treatment, perhaps even a distinct accounting regime. As context for that, the fair value debate is first placed in some historical context. Accounting rules for banks have not stood the test of time, especially at crisis time. Better recognition of the uncertainties associated with bank assets, and the fragilities associated with bank liabilities, might make for a more durable accounting regime.

Conclusion:

To date, accounting rules for banks have bent with the financial stability wind in ways which have amplified investor and regulatory uncertainty. To lean against the prevailing wind, accounting rules for banks may need to recognise more explicitly their differences. It is, after all, precisely these differences that justify separate regulatory and resolution regimes for banks. A distinct accounting regime for banks would be a radical departure from the past. But if we are to restore investor faith in banking sector balance sheets, nothing less than a radical rethink may be required.

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