Sarkozy seeks more flexibility on accounting rules
Jennifer Hughes in London and Ben Hall in Paris – 1 October 2008 –
London Ed1 – 06
The pressure on regulators and rulemakers to ease “fair value” accounting standards in an effort to help end the financial crisis has been intensified by politicians.
Nicolas Sarkozy, French president, is to urge his European counterparts this week to back changes that would introduce more flexibility in the accounting rules, while David Cameron, leader of the British opposition, yesterday said the rules had made the crisis worse and needed to be addressed.
Fair value requires companies to report the bulk of their financial holdings at their current market price. Falling house prices and plunging markets have led banks to write down the value of their assets, many of which are linked to mortgage loans, by hundreds of billions. This has weakened their balance sheets, undermining banks’ capital reserves and prompting fears of further downward spirals in prices.
A number of banks have called for a suspension of the rules in favour of being able to use their own internal estimates of the final values of their holdings when the underlying debt matures – a move that would bolster their reported balance sheets.
Mr Sarkozy is seeking to give political momentum to EU efforts to tighten financial market rules after France became yesterday the latest European government to use public money – €3bn ($4.21bn, £2.37bn) of it – to bail out , the Belgian-French banking group. The president called a “crisis meeting” of French banks and insurers to discuss the financial turmoil.
He had hoped to hammer out a common European position on regulation at a summit hastily convened in Paris for Friday with his German, British and Italian counterparts, as well as the presidents of the European Commission and European Central Bank. However, the meeting might have to be delayed because of conflicting schedules.
The French government has been at pains to emphasise the relative stability of domestic banks, which benefit from large retail businesses to help balance their investment banking operations.
But Mr Sarkozy is keen to respond to mounting public concern and take action, even though the EU has rejected a call for a US-style blanket rescue.
The French leader wants Germany, Italy and Britain to back moves to inject flexibility into EU fair value standards. France holds the EU’s rotating presidency until December.
Banks and insurers have complained that so-called mark-to-market rules – a snapshot of value – forced them constantly to write down the value of their assets, putting them under further financial pressure.
But auditors, regulators and investor groups have supported fair value and the transparency it brings.
“Politicians are looking for a simple answer here and there aren’t any,” Sam diPiazza, head of PwC, the biggest global accounting firm, said in an interview with the Financial Times yesterday. “To suggest you don’t track and report fair values means you end up in a world where management still knows the real prices as do market counterparties, but not the investors.”
The International Accounting Standards Board, which sets rules for more than 100 countries including the European Union, is due to hold an extraordinary board meeting tomorrow to discuss the role of accounting in the credit crunch. But it is not expected to soften its fair value rules.
Pressure mounts for easing of fair value accounting standards
Jennifer Hughes in London, Ben Hall in Paris and Joanna Chung in New York
1 October 2008 – USA Ed2 – 17
Global regulators and accounting rulemakers came under renewed pressure yesterday to ease fair value standards in an effort to help end the financial crisis.
Nicolas Sarkozy, French president, is to urge his European counterparts to back more flexibility in the accounting rules.
David Cameron, leader of the UK’s opposition Conservative party, said the rules had made the crisis worse and needed to be addressed.
The calls came as the US Securities and Exchange Commission reminded companies in a statement that they could use their own judgments to determine the fair value of assets that were not traded – while not relaxing the rules themselves.
Fair value requires companies to report the bulk of their financial holdings at their current market price. Plunging markets have led banks to write down hundreds of billions in asset values. This has weakened balance sheets, undermining banks’ capital reserves and prompting fears that it risks triggering a downward spiral in prices.
Many banks have called for a suspension of the rules in favour of being able to use internal estimates for a truer value for their holdings – a move that would bolster their reported balance sheets.
Mr Sarkozy will call for European leaders to agree on fresh financial market regulations, including “giving time to banks to smooth the effects” of the mark-to-market standards, said an official in Paris.
Robert Rubin, former US Treasury secretary and a senior adviser to , said fair value accounting worsened the financial sector’s problems. He told a Financial Times conference that fair value “is not serving our system well” and urged regulators to change the rules.
But regulators and investor groups have supported fair value and the transparency it brings.
Many regulators impose stricter standards when assessing banks’ capital requirements.
Auditors have also defended the accounting. Sam DiPiazza, head of PwC, the accounting firm, said in an interview with the Financial Times yesterday: “To suggest you don’t track and report fair values means you end up in a world where management still knows the real prices, as do market counterparties, but not the investors.”