more-arw search

Fair-Value Accounting Under Fire

Some banks' use of fair-value accounting has been criticized recently.

A Bank of England director who oversees financial stability recently struck out against the practice of letting banks skirt the chance of losing money on bonds and loans by retaining them until payment comes due. The Financial Times reports that Andrew Haldane, the financial stability executive

A Bank of England director who oversees financial stability recently struck out against the practice of letting banks skirt the chance of losing money on bonds and loans by retaining them until payment comes due. The Financial Times reports that Andrew Haldane, the financial stability executive at BoE, called for an overhaul to the banking industry and a shift away from fair-value accounting at a conference.

"There is a strong economic case for moving away from the existing intent-based convention for differentiating banking and trading books," he said, as quoted by the FT.

Haldane added that the practice of fair value accounting could tempt banks to take more risks than was safe, because it had made it appear as if the banks had performed much better in the time that securities prices were steadily increasing, the newspaper notes.

The FT's staff argues in an editorial that there are two potential negative side effects of having banks use the fair value method: "accounting practices can contribute to financial instability," particularly if they include a greater number of assets on the books; and it creates the potential for executives to shape their reports in a way that creates the illusion of greater profitability, thus driving their compensation higher.

Topics: