Calls have increased on both sides of the Atlantic for financial
regulators to not change accounting standards as they try to
achieve financial stability.
Speaking at an EC financial reporting conference in Brussels
earlier this month, UK Financial Reporting Council chief executive
Paul Boyle questioned those who thought accounting could be used to
deliver financial stability. He said there were many public
policies that should be considered before accounting rules are
changed. Boyle also queried whether accounting regulators had the
necessary skills to work on the problem of financial
Grant Thornton US has formed its argument into a public proposal.
The mid-tier firm wrote to the US Treasury, the Federal Reserve
System Governors and the Federal Deposit Insurance Corporation
suggesting the solution to the fair value debate lies in changing
the way regulatory capital requirements are established, rather
than changing accounting standards.
The core of the message was that regulators can already require
banks to increase the amount of capital they hold without changing
the financial statements, Grant Thornton managing partner of public
policy and corporate governance Trent Gazzaway said.
If they did this in line with Grant Thornton’s proposal, it would
increase regulatory capital requirements in booming economies,
which would serve as a braking mechanism for banks, preventing them
from investing in riskier assets by removing the available
This capital would be held as a reserve and be available in a
market downturn so banks could maintain normal lending
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Gazzaway suggested the increased capital requirements would also
attract investors looking for long-term value and safety.
“Those are the kind of investors we want in financial institutions
that have systemic risk because they don’t put the same pressure on
management for short-term earnings,” he explained.
Gazzaway said there is a lot of pressure on the Financial
Accounting Standards Board to make changes to accounting so the
effects will flow through to regulatory capital.
“That doesn’t have to be the case,” he said. “The minute we start
making changes to accounting standards, we are impacting the
clarity of the information to investors.”