FSA warns of hidden credit risk in lenders' books
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Lenders could be skewing the risk held on their mortgage books by failing to disclose the number of mortgages where terms have been renegotiated to avoid repossession.
The FSA and the Financial Reporting Council have today published a joint discussion paper on auditors and the role they play in improving prudential regulation.
It highlights that lenders’ forbearance strategies, such as extending the term of the mortgage or moving borrowers to interest-only, may be affecting the accuracy of the lenders’ loan loss provisions and consequently their company accounts.
Under IFRS, lenders may not be required to reveal the number of loans where forbearance strategies are being used.
The paper says: “There is a concern that there is little disclosure of the volumes of loans where some sort of forbearance strategy has been adopted, thus potentially obscuring the true credit risks of the book such as payment holidays or changing the loans from repayment to interest-only.
“Loans subject to forbearance strategies may not be regarded as ’impaired loans’ and they may not be considered to be in arrears or past due under their renegotiated terms, even if such terms are not consistent with the market.”
The FSA and FRC say the auditor has a key role in challenging banks’ management to consider making this information available in their financial statements, even though this is not specifically called for in the relevant accounting rules.
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Readers' comments (7)
Derek Hallas | 29 Jun 2010 5:17 pm
Has anyone realised that we are in a recession and that only gypsys have crystal balls. Of course there are going to be massess of people struggling out there it is obvious but why should lenders be accused of not forseeing this happen. If we had wanted a banking industry to take no or little risk on mortgages then we might as well all go home and bury our heads in the sands. I do hope lenders are looking at all options to keep people in their homes as it is ethical to do so and the Government that was insisted it was the right thing to do.
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Evan Owen | 29 Jun 2010 5:32 pm
Deary me, the regulators looking in the wrong place yet again? Missing the real risk once more?
What has regulation done for society?
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Simon Webster | 29 Jun 2010 5:41 pm
The really worrying point is that, yet again, the FSA was not already demanding this information. We all exepct banks to make payment arrangements in hard times (TCF etc) BUT we also expect our regulator to THINK & PLAN AHEAD so they can see in advance if these strategies are placing the banks under strain. Yet again they have failed. Yet again they are reacting after the event...
We need a regulator with vision.
It used to be "to really screw things up requires a computer". In our office we have replaced computer with the FSA - these days at least computers generally work...
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Stan Kirk | 29 Jun 2010 5:56 pm
So now in a desire not to be seen as 'weak' under new 'forbearance' guidance, the banks get tough on borrowers who they would previously have allowed some room for maneuver! Great work, I hope the FSA are really proud of themselves!
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Anonymous | 30 Jun 2010 8:19 am
Next they will be suggesting that those of us on especially attractive rates, such as Base + 0.29 for the duration, are a problem for the banks because they are undoubtedly loosing money on us at present.
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sean | 30 Jun 2010 4:27 pm
Horse, stable door, bolted etc comes to mind. Where were these geniuses when the banks were buying up sub prime debt left right and centre?
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Anonymous | 30 Jun 2010 9:50 pm
If the FSA have no idea that this is treating customers fairly, yes shock horror even the banks can do it when it suits them, then there is no hope for the industry.
Question; Does no one at the FSA have a mortgage?????????? Of course as we IFA's line their pockets they wont have arrears, but really we need areality check here don't we.
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