LONDON (Reuters) - Global regulators are planning the world’s first common rule within three years to value hard-to-price assets held by banks after unexpected revisions have unsettled investors, the man overseeing the plan told Reuters.
The initiative may face resistance from a banking sector worried that assets will be more conservatively priced, hitting bonuses and bumping up capital requirements.
“Regulators don’t have a benchmark for valuations at banks,” said David Tweedie, chairman of the International Valuation Standards Council (IVSC), an independent, not-for-profit, private sector body which develops valuation standards.
“Our job is to say that is how you arrive at the value. Let’s agree a model. The big ones we should have done within two to three years,” he told Reuters in an interview.
Despite warnings about hasty rulemaking from accountants, the Financial Stability Board (FSB), which coordinates regulation for the Group of 20 (G20) leading economies, is encouraging the work to plug gaps highlighted by the 2007-09 financial crisis and more recent announcements from banks.
Tweedie will start setting up this week a task force of regulators, standard setters, rating agencies and accountants to look at big variations in values and the pricing methods used.
Accounting rules set out when an asset is priced at the going rate, known as mark-to-market, but give little guidance on exactly how that information should be applied in a company’s accounts - especially if there is no market.
“The key one will be derivatives and how to deal with them when there is not a market. We could get resistance as this could affect bonuses and capital buffers,” Tweedie said.
The IVSC is incorporated in the United States with operational headquarters in London, and is funded mainly through membership subscriptions and sponsorship from the worlds of accounting, regulation and academia.
It currently has 74 member bodies from 54 countries, but does not have enforcement powers, and if any new rule is agreed, it would raise the question who would carry out the valuations.
Tweedie previously chaired the International Accounting Standards Board (IASB) which for the past decade has been aligning global accounting rules at the G20’s request to make it easier for investors to compare companies.
Six years after the financial crisis started, the IASB has yet to fulfill a G20 demand to force banks to make provisions for loans much earlier, a sign of the challenge the IVSC faces.
When markets froze during the financial crisis, it was hard to price assets like derivatives and since then there have also been unexpected changes in asset values.
Shares in Deutsche Bank fell up to 5 percent on Monday after the German lender surprised markets, partly due to a 623 million euro ($845 million) charge for various valuation adjustments.
The European Central Bank is now sifting through assets of top euro zone lenders, including Deutsche Bank, to make sure values reflect reality before it supervises them from November.
Last August, Britain’s Co-op Bank unveiled an impairment on loans of 496 million pounds after a fresh review. It followed a 351 million pound impairment in 2012.
“Could the market have seen that coming if they had done it differently?” Tweedie asked of the Co-op’s case.
Iain Coke, head of faculty at the ICAEW, an accounting body, said a new rule would be a complex undertaking as how an asset is valued often depends on the valuer’s point of view.
“If you are a regulator worried about whether the bank has enough capital then you may well have a particular bias to prudence, while for financial reporting it’s aimed at being more neutral, neither over or understating values,” Coke said.
“You can have a range of values even under a single accounting standard, which suggests it’s going to be a difficult task. It’s an ambitious agenda and we hope they are not going to be pushing too fast,” Coke said.
Other people familiar with the IVSC’s work said it was crucial to come up with principles that are not set in stone otherwise valuations cannot be improved on.
($1 = 0.7376 euros)
Editing by Mark Potter