CENTRAL BANKERS DEMAND NEW RULES / THE FINANCIAL TIMES ( RECOMMENDED READING )

Central bankers demand new rules

By Rachel Sanderson and Brooke Masters in London

Published: January 11 2010 12:45

Top central bankers and regulators underlined their differences with accounting rule-makers on Monday over the way banks account for bad loans, highlighting the politicisation of the standard-setting process.

The central bank governors and heads of supervision of the world’s largest economies, who oversee the Basel Committee on Banking Supervision, said it was “essential” that accounting rule-makers and their supervisors develop a “truly robust” approach on banks’ provision for bad loans.

Their six-point plan, which focuses on accounting for expected losses, clashes on several points with proposals laid out in November by the International Accounting Standards Board, the rule-setter for most of the world outside the US.

Accountants said there were “significant differences” between the IASB’s position and that laid out by the Basel Committee overseers. The oversight body’s proposals would, crucially, lead to more smoothing-out of bank profits through the financial cycle than the IASB proposals would allow.

“What the oversight body of the Basel Committee seems to be saying is something that is not exactly the same as the IASB,” said Tony Clifford, a partner at Ernst & Young. “It will be interesting to see how and if the IASB and the Basel Committee can actually agree upon a common accounting approach.”
Trichet upbeat on recovery

The world economy is in a “recovery mode” led by emerging market economies, Jean-Claude Trichet, European Central Bank president, said on Monday after comparing notes with global counterparts in Basel, Switzerland, reports Ralph Atkins in Frankfurt.

In some of his most upbeat comments in recent years, Mr Trichet reported “confirmation of the progressive normalisation of the economy and of the fact that at the global level we are in a recovery mode”. Emerging market economies had shown a resilience that “was the most striking in terms of fall of output”, and were “very clearly in a more dynamic mode now”.

But Mr Trichet stressed the importance of governments regaining control over spiralling deficit and debt levels resulting from emergency actions, and of the financial industry beefing up its risk management.

His comments highlighted policymakers’ confidence that growth is becoming re-established in the main economic regions – but with variations in the pace of recovery. On Thursday, Mr Trichet will present the ECB’s views on eurozone economic prospects, which could be more circumspect.
One senior accountant said: “The regulators and IASB seem to be sitting at the same table but speaking different languages.” The IASB said the proposals were “broadly consistent” with its own.

Accounting for expected losses would allow banks to provide for losses over the duration of a loan, rather than, as now, waiting until the losses have occurred – a practice criticised for exacerbating the crisis.

Crucially, accountants said the oversight body’s view that expected losses should ”draw from banks’ risk management and capital adequacy systems” was at odds with the IASB’s draft proposal, so too was its view that the new rules should consider losses ”through the cycle”. This would effectively allow banks to put aside more profits in good times to provide a buffer in bad times than the standard setter had suggested.

The oversight body, which is chaired by Jean-Claude Trichet, chairman of the European Central Bank, asked the Basel Committee to make proposals by March on provisioning for expec­ted losses for “consideration by both supervisors and accounting standard ­setters”.

Mr Trichet warned rule-makers they must not increase the scope of fair value accounting, which some European policymakers say worsened the crisis by forcing banks to value assets in a falling market.

The central bank governors and heads of supervision, who met over the weekend in Basel, also strongly endorsed the committee’s December 17 proposals to tighten the rules for banks around the world.

They include higher capital requirements, the first ever global liquidity rules and plans to introduce a new series of countercyclical buffers that would limit banks’ ability to pay out dividends and bonuses when capital is tight.

David Rouch, a partner at Freshfields, said Mr Trichet’s statement “underscores the fact that we are going into a highly politicised phase” as finance ministers and central bank governors are seeking to influence financial sector reform.

The Basel Committee has promised to conduct an impact assessment before adopting the new rules, but Monday’s statement makes clear that regulators are also concerned with the broader economy.

The rules are expected to come into effect in 2012.

Copyright The Financial Times Limited 2010