Regular readers know that it is not a change in accounting that is needed to restore investor trust, but rather requiring the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.
It is only when investors have access to this information that they truly can independently assess each bank and know what they own.
Stephen Haddrill, chief executive of the Financial Reporting Council, warned that Britain’s accounting standards would have to change to regain investors’ trust in banks.
Mr Haddrill, who is in charge of accounting standards in Britain, has in the past strongly rebuffed assertions that the International Financial Reporting Standards (IFRS) distort bank accounts and hide risks. But Mr Haddrill said there was a “real challenge to investibility” in banks and reporting standards should be used to rebuild trust.
However, he stopped short of agreeing with Andy Haldane, director of financial stability at the Bank of England, who has called for a separate accounting system to be devised by banks. Mr Haddrill said: “Banks are clearly different. But are they that different from a major global company with different judgements about financial instruments? I don’t think it’s evident that that’s the case.”Your humble blogger would agree with Mr. Haddrill over Mr. Haldane that there is no reason for a separate accounting system if, and this is the big if, banks have to provide ultra transparency.
With the information provided by ultra transparency, market participants can independently assess each bank and make all the adjustments that they need to create pro forma financial statements that reflect the true condition of the bank.
He added: “But the quality of narrative reporting is important . We need a balance of judgement, transparency and regulation not a compliance mentality.”The balance of transparency comes from requiring ultra transparency.