Debatt FT: Price of toughness

Debattartikel införd i Financial Times kring bankernas avsättning till kreditförluster

Price of toughness is that it becomes a smoothing device

Sir, Your editorial on the accounting standard IFRS9 on financial instruments (“Banks should not be able to game accounting rules”) advocates tougher accounting rules in banks. More precisely, the FT wants a more aggressive offset to provisions for future credit losses, and sooner. The technique in IFRS9, to adjust the loan for expected losses the first year and then search for indications of a change in credit risk, is deemed to soft.

However, there is a flip side to toughness in accounting. It becomes a smoothing device. In good times, when the loan book is expanded, the provisions push down earnings. In bad times it is the other way around. On top of that, the management can juggle with provisions to distort the short-term earnings trend. It is as difficult for auditors to deem whether the bulk of provisions in the balance sheet are too high, as too low.

This income smoothing is difficult to handle for investors. If the financial world would have consisted of only bondholders and creditors, conservatism is fine. They have a regulated upside (the interest income) and need to manage the downside carefully to get a decent return. Cushions are great. With equity holder’s it is different. Conservatism becomes a problem because insiders get the upper hand over outsiders in evaluating the true performance. Since bonus schemes and other incentives in banks often are based on the share price, the number of insiders is staggering. To let them have a constant advantage over outsiders does not really benefit society.

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