1. This unit looks at how an accounting standard for European banks was changed in 2008 in response to the global banking crisis.

Discuss these questions.

1 What sort of problems can arise if the amount of money that banks are allowed to lend to their private and business customers suddenly becomes restricted?

2 Briefly describe the crisis in the international banking system which began in 2007.

The amount of money that a bank can lend to its customers depends on the amount of capital reserves it holds. Therefore, if the value of a bank’s assets decreases, the amount of money it can lend also goes down.

Reading

1. Understanding the main points

Read the article on the opposite page and say whether these statements are true (T) or false (F).

Identify the part ofthe article that gives this information.

1 The European banks changed the way they valued certain types of asset in late 2008.

2 In Sir David Tweedie's opinion, this weakened banking accounting practices.

3 He said that the overruling of the IASB by politicians posed no particular threat to the gradual move towards a global set of accounting rules.

4 The change had the effect of increasing the book valuation of certain bank assets.

5 European banks originally used the amortised cost system of accounting to value their assets.

6 These changes came about after a sharp upturn in the economy.

7 In Sir David Tweedie's opinion, a change in the way regulators calculated a bank's lending ability would have been better than a change in banking accounting and reporting practice.

2. Understanding details

Read the article again and answer these questions.

1 Which institution was Sir David Tweedie representing?

2 Which institution imposed the new accounting rules?

3 In one week alone, by how much was the troubled European banks able to increase their asset values?

4 In that week, how much in losses did they save?

5 Which country's regulators had been moving closer to using the IASB accounting rules before the change?

6 What did the new amortised cost valuation rules require banks to do?

7 What was the banks' criticism of the old rules?

1. Text1.

Iasb questions relaxing of fair-value accounting

By Jennifer Hughes

A European banks' accounting practices deteriorated as a result of the relaxing of fair-value accounting standards in late 2008, according to Sir David Tweedie, Head of the International Accounting Standards Board (IASB). After a battle with the European Commission in

October 2008 , the IASB was forced to change its rules without consultation. He wamed that any further interfering in accounting rules by politicians would risk destroying the long-running project towards developing a single global set of accounting rules.

B The change helped troubled European banks reclassify some of their assets and avoid a hit to their earnings. In a single week, more than €1l3bn ($ 144bn) was moved under the new rules. This saved more than €3bn in losses from banks' revenues.

C The adjustment allowed banks to account for more of their assets using the amortised cost method. This way, asset gains are reported steadily over the lifetime of the financial instrument. Therefore, during a period of market volatility, the reduced market value of an asset at any specific point in time is not taken into account.

D The change came as the US Securities and Exchange Commission was close to releasing its own detailed 'roadmap' of how it proposed to shift from US accounting rules to the international system - a move that would effectively 'cement' the use of the IASB's rules as the single worldwide accounting language. However, Sir David explained that in order to create a level playing field for the international banking sector, the IASB had made its change only because its US counterpart was not yet in a position to do so.

E The new rules would require banks to disclose any assets valued at amortised cost. However, Sir David argued that the original 'fair-value ' system, which led banks to write down hundreds of 50 billions in the value of their holdings as markets plunged in 2008 , had its benefits. It had at least forced regulators and executives to face the problems head on , rather than hiding from them.

F He warned that in spite of the added disclosures, using amortised cost would still allow banks to rely to heavily on their own judgement in valuing their holdings - a practice he questioned.

'They bought these assets originally and thought they were going to be fine. Well , they weren 't. So how accurate is their long-term assessment?'

G On the other hand, many banks had complained that fair-value accounting was pro-cyclical because it helped to exaggerate the impact of a downturn. They had criticised the rules for reducing their capital reserves by making them report losses on assets which they continued to hold and ad no intention of selling.

H Regulators closely link their assessment of a bank's reserves with its published accounts. These watchdogs can suddenly require a bank to hold more capital when markets are falling - at the very point when it is hardest for it to do so. Sir David argued that it would be better if regulators changed the way they used a bank's accounts to calculate its capital needs.

I The changes created a storm in the accounting and regulatory world. Some observers warned that by giving in to political pressure, led by European opposition to the current fair-value rules, the IASB had permanently damaged its credibility.