Banks need radical bespoke accounting rules to clear the confusing fog over valuing assets held on their books, said a top official at the Bank of England, which takes over regulation of UK lenders next year.
The bookeeping rules used by banks amplify investor and regulatory uncertainty and may need to recognize more explicitly differences between banks and other types of companies, Andrew Haldane, Bank's executive director for financial stability, said.
It is, after all, precisely these differences that justify separate regulatory and resolution regimes for banks, he said in a speech released Thursday.
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, Haldane said.
As the financial crisis began unfolding in 2007, policymakers called for an easing of the fair value rule so that banks don't have to price all their assets immediately at values that were falling fast, making them unstable and in need of bailouts by taxpayers.
The International Accounting Standards Board (IASB), responsible for accounting rules used in Britain and the rest of the European Union, agreed to ease its fair value rule in 2009 but the EU has yet to endorse the changes.
The IASB has no plans to forge a separate set of rules for banks and had no comment on Haldane's remarks.
Haldane said such tweaks were typical of what happened after market upheavals with fair value strengthened in good times as prices rise and eased when prices are falling.
Regulators and investors alike fear the fog created by such forbearance, Haldane said.
A reasonable starting point would be to recognize the clear differences between bank and non-bank balance sheets, in particular valuation uncertainty associated with assets and maturity mismatch associated with liabilities, he added.
Iain Coke, head of the financial services faculty at the ICAEW accounting body in the UK said if banks are given special treatment other industries would also ask for special treatment.
We don't support a call for special attention for accounting rules in banks, Coke said, adding that more clarity on valuations could be made in regulatory filings.
(Reporting by Huw Jones; Editing by Erica Billingham)