The joy of Ritchie

IFRS changed that: what it said was that loan losses should only be booked as they were incurred. So, unless and until a loan actually went bad nothing should be done about it in accounting terms even if it was entirely anticipatable that it would, at least in part, fail. This measure also had the net impact of reducing general loan provisions that recognise that some loans will fail, but you just don’t know which ones as yet.

The 2005 changes had a massive impact on bank profits: they rose enormously. This in turn had a massive impact on the economy. Bank loans could be offered to people who may not be able to repay without any impact on current reported profit: in fact, the upside of fees and charges could be taken immediately and the losses could be deferred. So, not only did profits increase, and with that bonuses, the share price, stock option valuations and so much more that all favoured bankers in the short term, but risk for everyone else rose at the same time. Banks did, effectively, dump their risk on the rest of us.

They also obviously massively overpaid corporation tax but strangely, Ritchie doesn’t mention that.

18 thoughts on “The joy of Ritchie”

  1. Whereas, I actually recall loan availability becoming significantly tighter during that timeframe.

    Which led to things like this.

    But then I only worked at a bank. I am not the tax and economics guru for the future Prime Minister of the People’s Democratic Republic of England (and possibly Wales).

  2. can somebody explain to me how this could effect the magnitude of profits, as opposed to merely their timing?

    if provisions turn out to be excessive, they get corrected, right?

  3. C’mon, paying more corp tax is a second-order effect of the primary effect of booking larger profits (boo, hiss, nasty banksters etc).

    Even a 2nd order effect so obvious is below the horizon.

  4. Murphy is wrong – it was *not* an IFRS change, it was a change in taxation treatment mandated by Brown .IAS36 spefically states that when an asset is impaired – including financial assets within the scope of IFRS9 Financial instruments, it should be written down to its recoverable amount.

    Either he is blatantly ignorant of International Accounting Standards, or he is straightforwardly lying.

  5. “can somebody explain to me how this could effect the magnitude of profits, as opposed to merely their timing?”

    Higher profits, even if only brought forward by a few years, give the bank an extra dollop (temporary) of capital that can be invested/used for trading, thereby generating higher profits than would have otherwise occurred if the bank was constrained by its capital.

  6. @ Luis Enrique
    What difference it makes is that banks reported and paid tax on imaginary profits while Brown was Chancellor, so hiding the size of the budget deficit, and then recorded losses when borrowers defaulted on the loans under Darling and Osborne, making the size of *their* structural deficits look even worse than reality.

  7. @John77 – and paid them under the higher Brown rate rather than the lower Gideon rate (although that’s 20:20 hindsight, of course…)

  8. thanks all.

    Alex my first reaction was yeah but that’s only accounting profit not money it can do anything with, but then I guess that capital adequacy ratios are also accounting objects and to extent they are constraints, that’s how it works. Have I got that right?

    john77 would be interesting to quantify that!

  9. Alex,

    “Higher profits, even if only brought forward by a few years, give the bank an extra dollop (temporary) of capital that can be invested/used for trading, thereby generating higher profits than would have otherwise occurred if the bank was constrained by its capital.”

    But don’t bankers know that a proportion of their loans will go bad? No one was forcing them to invest/trade with their paper profits on the assumption that no loans would go bad.

    As an analogy, insurers reserve for “incurred but not reported claims”. Not sure how that’s treated for tax, but they assess their profits for any year on the assumption, based on experience, that a number of claims will be made/deteriorate in later years. They don’t look at the cash position on 1st Jan and say “we’re rich, weren’t we clever in our underwriting.” (Or at least they shouldn’t.)

  10. @ Luis Enrique
    I do not have a sight of the banks’ internal provisions against their published ones in 2001-8 so I can only point to over £100billions of exceptional provisions since then. A few billion of these are due to the banks’ wilful blindness when lending on Irish property, but it looks like scores of billions of tax brought forward to hide Brown’s budget deficit.

  11. As usual, Murphy gets it all wrong. IFRS 9 is replacing IAS 39, and what that will accomplish (among other things) is allow for more timely recognition of asset impairment than was available under IAS 39.

    Contrary to what Murphy has written, IAS 39 never stated that “losses should only be booked as they were incurred”. He seems to think IAS 39 forbade the booking of any form of expected credit losses.

    That’s incorrect.

    Rather, under IAS 39, the model for recognizing loan impairment was written in such a way that made it difficult to recognize impairment quickly. IAS 39 allowed for recognition of expected loan losses, it just didn’t allow for that recognition to come about without the passage of a certain amount of time.

    Here’s what the IFRS actually said:

    “During the financial crisis, the delayed recognition of credit losses on loans (and other financial instruments) was identified as a weakness in existing accounting standards. As part of IFRS 9 the IASB has introduced a new, expected loss impairment model that will require more timely recognition of expected credit losses. Specifically, the new Standard requires entities to account for expected credit losses from when financial instruments are first recognized and it lowers the threshold for recognition of full lifetime expected losses.”

    Once again, we see that Richard Murphy is simply unable to master the basics of his chosen profession.

  12. @ Dennis
    Paragraphs 58 and 63 require provisioning as soon as there is objective evidence of impairment. So there doesn’t need to be that much time delay – whereas the Brown tax treatment meant you couldn’t provide for losses beyond the next balance sheet date.
    Yes, IAS39 has the failing that it does not allow for general provisions against future deterioration in the financial condition of a borrower, but Brown’s tax treatment, which Murphy WRONGLY attributes to IFRS is very different – it prevents specific provisions against loans that are expected to default in thirteen months’ time.

  13. john77-

    So in other words, on any given day Ritchie can’t distinguish between IFRS and UK tax code.

    Which still means he hasn’t mastered the basics of his profession… Only now his incompetence is for worse than originally thought.

  14. @ Dennis
    Yeah, and he’s even got the UK tax code slightly wrong – you could provision for defaults which you knew would hit before the end of the accounting year (because most loans have a grace period before they are actually declared in default, if you didn’t then a loan due in December but with a grace period extending into January would be recorded as an asset at full value after it had defaulted).

  15. Ok I’ve been out of the accounting field for a few years , but even without looking it up I would have called bullshit on that based on general principles alone. Murphy might be a retired accountant, but looking at his resume I doubt he dealt with the accounts for any major financial institutions. Like a lot of professions accounting has general and specific knowledge, if you have not dealt with some areas (say multi national consolidation in multiple currencies or revenue reocognition on multi-year contracts with maintenance and warranty support or complex financial instruments as examples) then knowing the theory is a long way from being able to do the work. And as has already been
    Also the U.S. Doesn’t follow IFRS so a comparison of their rules as opposed to IFRS would have helped.

  16. Bloke –

    Given that Ritchie managed to fuck up the provisions of IAS 39, IFRS 9 and UK tax code in a single sentence, I think it’s a bit harsh to point out the fact that he failed to also fuck up U.S. GAAP in that same sentence.

    Give the boy the credit he is due.

  17. Dennis

    That’s why he is always forced into the position of saying ‘wise men agree’ – but you raise an interesting point – if he is so ignorant on accounting standards, why the fuck should we pay attention to anything he has to say on anything else? Can’t someone just poison his dinner and be done with it….

  18. “Wise men agree”, and if they don’t agree then they are industry lobbyists and can be ignored. Or worse, they are ‘trolls’ or, God forbid, neo-liberals.

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