Can a change in accounting stop the next financial crisis?
Held on Wednesday, June 1, 2016
Sue Lloyd (Board member, IASB)
Tony Clifford (partner and Global IFRS Financial Instruments Leader, EY)
Glen Suarez (chairman, Knight Vinke Asset Management)
Eric Tracey (steering group member, FRC Financial Reporting Lab)
What should we be talking about at this round-table?
Email your suggestions for the agenda to Harry Atkinson.
Of the hundreds of billions of dollars of losses made by banks post-crisis, the bulk came in the traditional way: on property and through lax lending. It is clear that banks had built up too little capital in the good times to absorb losses in the bad times. But is the best remedy to try to anticipate losses?
IFRS 9 Financial Instruments, the new financial reporting standard issued by the International Accounting Standards Board (IASB), will require banks to provide for “expected losses” on loans. Under the old “incurred loss” model, loans were not impaired until there was evidence of default (eg missing interest and/or principal payments). While avoiding a return to the bad old days of “hidden reserves”, IFRS 9 does require the upfront recognition of some expected losses. The initial top-slicing of profits is a step towards the old approach to reserving and perhaps also reflects pressure on the standard-setter – from politicians and prudential regulators – to do something.
But it’s complicated. The initial provision for an expected loss will look ahead 12 months. If evidence then indicates that the risk of loss will be worse than expected, the loan will be assessed for the potential loss over its entire life. While all this forecasting and estimation is intended to provide investors with better information about loan pricing and changes in credit quality, it also involves a lot of accounting judgments.
Hans Hoogervorst, chairman of the IASB, has said that the new model could lead to an increase of 35 per cent in the level of loan loss provisions at banks (yet another way in which they will not be as profitable as they appeared to be before the crisis). Nevertheless, it is not a fool-proof inoculation against either heavy losses or the economic cycle, nor should it necessarily be one. It is the unexpected that tends to cause businesses the most trouble.
IFRS 9 will be implemented in 2018, which means preparations start now. To lead our discussion on whether this change in accounting will make banks more resilient, we are delighted to welcome:
- Sue Lloyd, an IASB Board member since 2014, having previously served as the technical director responsible for the team developing IFRS 9 and as director of capital markets. Between leaving the IASB in 2004 and returning in 2009, she worked at JP Morgan and Goldman Sachs.
- Tony Clifford, partner and Global IFRS Financial Instruments Leader at EY.
- Glen Suarez, chairman of Knight Vinke Asset Management and member of the IASB Capital Markets Advisory Committee. He is a former partner in Soditic, a corporate finance and investment firm, and spent nine years at Morgan Stanley, where he headed the European utilities group.
- Eric Tracey, who is a steering group member of the FRC’s Financial Reporting Lab, as well as a partner in GO Investment Partners, the senior independent director at Findel PLC.