Transition to an international accounting regime characterised by forward-looking provisions on bank’s losses needs to be speeded up, the Bank of England (BOE) has urged standard setters in a report published yesterday.

"Progress towards convergence on an agreed forward-looking framework between the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) has been much slower than requested by G20 leaders," the BoE said in its financial stability report.

Prepared by the BOE’s financial policy committee, the report addresses the need for banks to maintain capital buffers against unexpected losses and draws attention to which accounting treatment should be adopted for that purpose.

The BOE warned that although new proposals might be introduced soon "even if agreed, implementation would come later" making problems to persist in the short term.

In particular, the BOE explained, this leads to a structural vulnerability which could "increase uncertainty over UK banks’ capital positions and act as a drag on lending".

BOE stated that bank’s forborne loans "may not incur a measurable loss or evidence of impairment" and as a result "may not be provisioned for under the ‘incurred loss’ framework".

BOE Governor Mervyn King said the report raises concerns over three reasons which led the BOE to think UK bank’s buffers are being overstated.

"First, expected future credit losses may be understated; second, costs arising from past failures of conduct may not be fully recognised; and third, the risk weights used by banks in calculating their capital ratios may be too optimistic," King observed.

The report also recommends the UK Financial Services Authority (FSA) ensures that UK banks reflect a proper valuation of their assets, a realistic assessment of future conduct costs and prudent calculation of risk weights.

"The FSA should ensure that firms either raise capital or take steps to restructure their business and balance sheets in ways that do not hinder lending to the real economy," King said.

Related link

Bank of England: Financial Stability Report