EU regulators back emergency change to bank accounting rules
By Nikki Tait in Brussels and Jennifer Hughes in London
16 October 2008
Asia Ed1 – 15
Accounting rules blamed by some banks for exacerbating the financial turmoil look set to be eased across the European Union, bringing the 27-country bloc in line with changes agreed by international accounting rulemakers.
An EU regulators’ committee in Brussels voted unanimously in favour of accepting the emergency changes made by the International Accounting Standards Board on Monday. These will give banks more leeway in how they value certain assets whose prices have plunged.
Lawmakers in the European parliament then quickly endorsed the vote, while member states also gave their unanimous support. This means the changes, which are optional, can now apply to calculations of banks’ third-quarter results if they wish.
Under the rule change, financial institutions would be able to “reclassify” certain instruments. This means they can move them from their trading books, where they must be marked at “fair”, or current, market values, to their banking books. Here, they can be reported at amortised cost – so any further falls in market prices would not have to be reported, and any gains would be spread over the lifetime of the assets.
The IASB changes followed heavy pressure from European banks and politicians. European companies had complained that US rules gave their American rivals greater flexibility.
The issue was picked up by EU finance ministers last week, who urged international accounting standard boards to work together and “welcomed the readiness” of Brussels to take appropriate action “as soon as possible”. They demanded that the reclassification issue be solved by the end of the month.
However, there were fears discrepancies could arise between the approach taken by the London-based IASB and EU rulemakers, but that worry appeared to recede yesterday. The financial community, however, remains divided about the wisdom of easing up on fair value accounting.
Those in favour include some banks and insurers who believe their balance sheets are being weakened unnecessarily. Those against include many regulators, auditors and some investors, who think that using market prices reflects current economic reality, however harsh that may be.