February 9, 2011 / 1:49 PM / 9 years ago

Accounting chief calls for more credible bank test

LONDON, Feb 9 (Reuters) - Last year’s European Union bank stress tests were not credible as they failed to reflect falls in sovereign debt prices, the incoming head of the world’s biggest accounting standard setter said on Wednesday.

“One reason for scepticism was that sovereign bonds on the banking book were deemed to retain their full value, despite the fact that many were trading at steep discounts in the market,” Hans Hoogervorst, who takes over on July 1 as chair of the International Accounting Standards Board (IASB), told a European Commission hearing in Brussels.

“The fact that some Irish banks that had passed the test later turned out to be insolvent only served to reinforce the doubts in the market,” said Hoogervorst, a former Dutch finance minister and now head of the Dutch markets regulator AFM.

The EU and International Monetary Fund put together an 85 billion euro bailout for Ireland in November because of the deteriorating condition of its banks. It followed a bailout of Greece in 2010.

Supervisors are now locked in talks over how to make this year’s stress tests tougher, but there is disagreement over whether to include falls in sovereign debt prices.

Hoogervorst questioned the message last year’s test sent to auditors, who have been criticised for giving a clean bill of health to banks that failed in the financial crisis.

“How critical will auditors be when they see that regulators consider that severely discounted securities carry no risk?” he said in his first speech as incoming chairman of the IASB, whose rules are applied in over 100 countries.


He also emphasised that the principal responsibility for making the financial system safer and less volatile rested with supervisors, not with accounting rules.

Accounting’s core role is to keep investors fully informed, he said. In some cases that can contribute to stability; the IASB has, for example, amended its rules to give banks more flexibility in how they value assets on their books to ease market volatility during a crisis.

It will also force lenders to anticipate losses on loans much earlier so they can make speedy provisions — top of the “wish list of prudential regulators”, Hoogervorst said.

But only supervisors can directly influence stability, such as by forcing banks to increase their capital cushions, he said.

Past efforts by authorities to temporarily hide the true state of banks will no longer work in the age of the Internet, intrusive media and activist shareholders, he said.

He signalled tighter reporting of off-balance-sheet banking activities and that a “perverse” rule on classification of financial liabilities that inflates profits when a bank’s credit standing deteriorates, will also be changed. (Reporting by Huw Jones, editing by Will Waterman)

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