Inconsistent Capital Ratios Big Issue for Banks

The lack of consistency and reliability of capital ratios represents as big an issue for banks as the unfinished accounting standards, says Robert Hodgkinson, ICAEW executive director at the joint ICAEW/IFRS Foundation Financial Institutions IFRS Conference in London.


“Improving requirements for financial instruments accounting following the global financial crisis has become a rather tangled and frustratingly slow process," says Hodgkinson. "In an ideal world, we would have liked to have seen a final revised financial instruments standard by now. We have repeatedly urged the standard setters to complete their work on impairment as a matter of priority."


In his keynote speech at the conference, IASB Chairman Hans Hoogervorst said standard setters are struggling with the accounting standard for financial instruments.


Hodgkinson notes that sound accounting standards and effective implementation of their requirements are absolutely key to effective communication by financial services companies with their shareholders. "However, this alone may not be enough to present the full picture,” he adds.


The interaction between accounting standards and bank regulatory capital requirements has complicated the finalisation of the financial instruments accounting standards.


“One of the reasons why there has been so much pressure on financial reporting standard setters over the financial crisis has been the impact of accounting on regulatory capital. It is increasingly clear that bank capital ratios are neither as comparable nor as reliable as they should be, irrespective of the accounting treatment," says Hodgkinson.


Hodgkinson explains that banks use internal models to calculate their capital ratios. "Recent exercises by bank supervisors have highlighted wide differences in how different bank models would assess the capital requirements for the same hypothetical group of assets,” Hodgkinson adds.


Hodgkinson concludes that regulatory capital is a key performance measure used by analysts and investors. "Banks and banking supervisors are working hard to address the inconsistency in capital ratios. However, until they become more reliable they threaten to undermine the credibility of the regulatory system.”


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