Wonkish point on banks and recognising losses

My memory\’s not perfect, I admit, but isn\’t this rather a return to the old days?

The International Accounting Standards Board (IASB), whose rules are followed by all the UK’s major lenders, has set out a series of rule changes that will require banks to recognise losses far earlier.

Under the current rules, banks are only required to account for a loss when it occurs or if they believe they could exceed a certain threshold. However, the new code would force lenders to recognise upfront all the losses they could have to take against a loan over its life as soon as their is evidence of any deterioration in its value.

The change is expected to answer criticisms that the current rules gives banks too much leeway on when and how much to take in provisions against their assets.

As I say, memory\’s not perfect. But wasn\’t this how things used to be? Banks would make provisions for what losses they thought might happen in the future? Almost to hte point where they would write down some standard percentage of all new loans just because some would undoubtedly go sour?

And this might indeed be good in a prudential sense. But, again faulty memory, wasn\’t the reason this was stopped because it was just too easy for a bank to manipulate its results by doing so? Oh, and, obviously, those loss reserves come off the tax bill too.

My assumption therefore would be that these new rules would mean a fall in hte tax take plus a certain greater regularity in bank results as they push in and pull out such reserves to manipulate earnings.

Maybe that\’s a good idea and maybe its not but it will be interesting to see the reaction of those who bleat about banks \”paying their way\” won\’t it?

18 thoughts on “Wonkish point on banks and recognising losses”

  1. A meeting, in a smokeless room at the Ministry of Regulational Affairs:

    “You know what went wrong last time?”

    “Well, lots of things. What, specifically?”

    “Well, we had no system for foreseeing the unforeseeable. Then, the unforeseeable happened, and the economy collapsed.”

    “Ah, yes. That’s true”.

    “So what we need to do is to introduce some kind of system in which unpredictable events are predicted ahead of time. Then it won’t happen again.”

    “I like your thinking! What if… I’m just ballparking here, you know but… what if we required the banks to formally notify us of unforeseeable circumstances ahead of time?”

    “Yes. That would work. We could require them to send in a nice form at regular intervals, listing the unknown unknowns which are due to occur. It’s foolproof!”

  2. Ian,

    You really think that they think that hard? More like:

    SPAd1 – We’re getting bad publicity about banking regulation.

    SPAd2 – Well, we’re setting up the FCA – the Governor has already described that as “prudent”.

    SPAd1 – And we know what happened last time somebody talked about “prudence” in here …

    Geriatric Teaboy – I was a bank clerk when I was younger and we used to do this thing called “Provisions” …

    SPAd2 – Ah, yes, now all we need is a spiffy new name for it. We’ll call it “upfront recognition of potential losses …”. Hey, no milk in mine!

  3. SE-

    True.

    Also, regarding the problems with Tim’s website, I can’t seem to find the thread where we all have a jolly good time gloating over The Fall Of The House Of Huhne.

  4. I do not remember where I say it but the phrase there are no solutions only trade offs comes to mind 🙂

    perhaps it will work without punctuation..

  5. Insurers have IBNR losses, being an allowance for losses that have happened that they don’t know about, eg someone’s been injured and news hasn’t got through to the insurer by year end.

    That seems much easier to manipulate, but the sky has not fallen yet.

  6. General provisions for bad or doubtful debts are not allowable expenses for tax purposes; only specific provisions based on evidence that particular debts will not be repaid are so allowable.

  7. H is right. And in any case, it would only be the change in provision, not the provision itself, which would make a difference from one year to the next. If there was a general over-provision, not only would tax relief not be allowable, but tax would be payable on the resulting, necessary, decrease in the provision.

  8. Ian B @5

    It’s in the February archive, at least it is for my browser. Visiting this site now is a bit of a mystery tour, perhaps it’s like a modern zoo hiding the animal’s food to give them a bit of mental stimulation.

  9. H

    That is and was certainly true for normal trading companies but I seem to recall (possibly mistakenly) that banks and insurance companies were allowed to create – and have tax allowed in respect of – general bad/doubtful debt provisions.

  10. @Umbongo – my understanding is that HMRC allows banks and the like to group loans with similar characteristics where individual loans were not in themselves material, which of course should be the case for almost all loans made by a large bank. But the provision made against a group of loans must then nonetheless be justified by reference to observable cash flows, evidence of impairment etc. – it can’t just be a straight reaction to e.g. changes in credit ratings or changes in economic circumstances. Imho, this is simply HMRC recognising that it would be impossible for a bank to assess every

  11. individual personal loan of ÂŁ500, rather than an exception to the ‘normal trading company’ rule. Although I expect that the Murphmeister sees it all as a conspiracy by shadowy forces.

  12. But then they changed the corporation tax law on loans in the late 90s (the loan relationships guff) so that tax now largely follows the accounting treatment – in part because the accounting treatment had changed to make it more difficult to make general provisions.

  13. Sadly, I’m old enough to remember when there were just two accounting standards in the whole world.

    SSAP 1 dealt with associated companies (no I haven’t a clue either) and SSAP 2 dealt with the fundamental accounting principles (yes, I know).

    The big part of SSAP 2 was that prudence prevailed. This gave rise to lots of nerdy, smutty jokes at the time, even though Prudence had long since ceased to be a girl’s name.

    Doubtless these ancient concepts have been deemed insufficiently modern, but certainly I still follow the principle. You provide for a bad debt as soon as the credit controller doesn’t get his calls returned.

    It seems highly likely that modern practice relies on bits of paper, like those that say “This Is Beef” even though it’s attached to something lying on the floor still wearing the saddle and the bridle.

  14. @john miller, I remembering asking one of the older hands what happened before SSAPs came in. ‘We just had to decide whether the accounts gave a true and fair view’, he said. Happy days.

  15. and what about the sovereign debt crises of the 80s/90s, when banks could provide against government bonds in accordance with a matrix agreed by the IR?

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