Tuesday 22 August 2017

'Faulty' accounting guidelines contributed to the banking crisis

Laura Noonan

Laura Noonan

IRELAND's banks are still using "faulty" accounting standards that exacerbated the collapse of the financial system, an influential watchdog has warned the Government.

A letter sent to Finance Minister Brian Lenihan lists a catalogue of alleged flaws in the way Ireland implemented new accounting guidelines in 2006.

It says these faults directly contributed to the high level of banking failures and near-failures in both Ireland and the UK, compared with the rest of Europe.

The letter was penned by Tim Bush, a City of London veteran who sits on a taskforce that scrutinises the work of the Accounting Standards Board. The ASB sets standards for Ireland and the UK.

In his letter to Mr Lenihan, Mr Bush claims that a series of "errors and omissions" made when the latest accounting standards were introduced "can be fairly described as catalysts in the financial crisis in the UK and Ireland".

Mr Bush writes that Ireland and the UK were the only European countries that used the 2006 rules to radically change the way banks made provisions for bad debts.

"Under the old rules, if the bank lent €100,000 to someone, they'd make a risk assessment of how much they were likely to get back and make an immediate provision for that," he said last night.

"Under the new rules, you don't make those provisions until the loans actually start going bad. People wonder why banks can go from looking good to bad so quickly -- this is why."

False profits

The rules were introduced across Europe, but most countries applied them only to the preparation of "group" statements, while individual bank companies still made loan provisions in the old-fashioned way.

Mr Bush said the fact that banks in Ireland changed their provisioning across all their reporting drove higher levels of lending and inflated their profit figures.

"The fact is that showing losses (provisions) constrains the ability to lend," he explained.

"It also constrains people wanting to lend. False profits in a banking company are deadly."

In his letter, Mr Bush uses the situations of Anglo Irish Bank, AIB and Bank of Ireland, as well as several UK banks, to back up his arguments.

Noting the "lack of understanding" shown when the new rules were introduced, he says Ireland may find that "several problems that remain unresolved after the crisis can be traced back to one relatively simple cause".

Irish banking sources yesterday said the issue of how to treat loan provisions was a "very live issue".

One said: "People recognise there are shortcomings in the way the rules were implemented and it does need to be addressed."

A spokesman for the Department of Finance declined to comment, pointing out that Mr Bush's letter had not yet been received by Minister Lenihan.

However, one Irish banking source said last night that the new rules could actually exaggerate losses, since banks are forced to make provisions when there is "objective evidence" that a loan has become impaired.

Another Irish source said that while accounting may have been a "contributing factor" to the Irish banking collapse, it was a "farce" to blame it for the entire fiasco.

Irish Independent

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