European Union regulators have backed proposals to reform the "mark-to-market" accounting rules that many banks blame for forcing them to declare far larger writedowns than have been necessary during the credit crisis.
The European Commission's regulators committee said it would adopt the reforms unveiled earlier this week by the International Accounting Standards Board. It said that banks should be allowed to value certain assets on the basis that they will be held to maturity rather than being forced to estimate their current fair value.
The current accounting rules require banks to assess the value of trading positions in the market. In the case of many of the securities at the centre of the credit crisis, where there has been almost no liquid market for trading, this has forced banks to write down billions of pounds from the value of the assets. The commission said it was accepting the IASB's proposals with immediate effect, which should give European banks the opportunity to present third-quarter results on the basis of the new regulations.
The new rules will allow banks to transfer some assets out of trading books, where they can show they intend to hold them for the longer term. The move would give banks much-needed stability in the valuations of their assets. The impact of the reform could be dramatic. KBC, the Belgian bank which yesterday announced a writedown of €1.6bn (£1.25bn) on collateralised debt obligations (CDOs), indicated that its third-quarter profits could be as much as €500bn higher.
A spokesman for the bank said: "It's kind of a conservative rough estimate that if and when we would be able to reclassify our CDO portfolio thanks to changes in the fair value accounting rules in Europe, the positive profit impact would be about €500m." The EC stopped short of offering more generous relaxation of the rules that some states, notably France, had been pushing for. One option was to offer banks a very wide freedom to transfer assets out of trading accounts, with the French hopeful, for example, that many derivative positions might have been included.
John Hitchins, the UK banking leader at accountant PricewaterhouseCoopers, said: "The IASB amendment is not a departure from fair-value accounting – [it permits] some limited transfers out of trading books where the intention trade has been replaced by the intent to hold them."
Yesterday's rule change will also align the accounting rules in Europe with those in the US.Reuse content