FT: No accounting by taste

22 January 2012

FT published a remedy for the deep flaws in how banks' worth is measured that could be caused by banks' pressure on the accounting standards boards to relax rules on “fair-value accounting”.

Andrew Haldane, the Bank of England’s executive director for financial stability, points out that the ability to shift assets between the trading book (market to market) and the banking book (assumed to be held to maturity and not sold at market prices) renders accounting practices procyclical and biased. In good times, rising asset prices give an incentive to mark more assets to market to book the profits that emerge. Bad times bring the opposite incentive: to avoid realising losses or accounting for the higher risk that they may happen.

Market to market especially affects banks, even if the point is a general one (think Enron). Their balance sheets are bigger relative to equity than other companies´, and the treatment of assets highlighted by Mr Haldane is not all that goes wrong. Banks notoriously book as profits balls in the market value of their own debt – a notional reduction of their liabilities that signals financial weakness, not health.

Press release

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