Our governor of the Central Bank, the formidable Patrick Honohan, delivered a speech to the Institute of Certified Public Accountants yesterday. In it he summarised for the umpteenth time the background to our financial crisis but extracted the role that accounting has played, and bemoaned how badly we have been served by practices which failed to look beyond the balance sheet date. It seems a little cowardly though that he didn’t go further in his speech and call for the immediate implementation of an accounting standard, International Financial Reporting Standard 9 (IFRS 9), which will be mandatory from 2013 onward but is discretionary until then.
The accounting business (or profession if you must) as a whole decided when the global financial crisis kicked off that its practices were unsuitable for valuing loans in environments had led to enormous losses which were not signposted in financial statements. Loans had been valued by reference to International Accounting Standard 39 and in 2009 accountants introduced a replacement that might be more fit for purpose, IFRS 9, which allows for more realistic valuations. IFRS 9 will become mandatory from 1st January 2013 and until then offers some discretion which each of the five NAMA Participating Institutions (PIs – AIB, Anglo, BoI, EBS and INBS) has opted to take advantage of. From the interim report for each of the five PIs (except INBS which didn’t produce interim figures so its full year 2009 results are used) here are the % loss provisions for the remaining tranches at 30th June 2010, the discounts on Tranche 1 which was completed in May 2010 and the final estimate from Minister for Finance Brian Lenihan in the Dail on 13th October, 2010.
So we have the above fantasy accounting from banks which does not give a “true and fair view” of losses and this fantasy is only a couple of months old in all save INBS’s case and was allowed by the governor who has been in post since September 2009. Of course the governor might think that now is not the time to bring forward the crystallisation of losses. If that were to be done, then the likelihood is that Bank of Ireland would tip over into majority State control. So it seems the governor’s speech lacked the courage of its convictions.
Elsewhere in his speech he claims that NAMA “agreed to conduct a sample review of the full range of tranches” before providing the estimated haircuts that were announced at the end of September. Sadly it may take up to 12 months after the last tranche is transferred before we know how productive that exercise was and how realistic the final estimated haircuts have been. Aside from the berating of accounting practices, the speech might be best remembered for criticising the Stability and Growth Pact for not being helpful in dealing with shocks to the system.