Haldane: Asset valuation may have worsened crisis

ACCOUNTING and reporting rules for banks’ assets and liabilities have in part contributed to financial crises and can lead to confusion, Andrew Haldane, the Bank of England’s executive director for financial stability, said yesterday.

Fair value accounting can lead banks to overestimate profits in boom years, he said, because their assets are inflated in a way which will not help them in a later bust.

He argued that it may be better for regulators to know how banks balance sheets look when assets are valued at “fire sale” prices, showing the authorities how safe a bank would be if it had to sell illiquid assets urgently.

Haldane also raised the question of the presentation of auditors’ reports.

“A ‘clean’ verdict runs the risk of that judgment being quickly invalidated if maturity mismatches are exposed by a liquidity run,” he said, whilst any other verdict could itself cause a run on the bank.

A “less binary” approach may be needed to avoid the problem, he said.