Bank of England warns against Lehman style accounting ‘gimmicks’
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The Bank of England has warned UK banks that it is essential that their balance sheets are not fudged to concentrate on end-period figures.
In its Financial Stability Report, the Bank said it was “essential” for banks to disclose honest reports. It uses the example of Lehman Brothers, which was revealed to have used a “Repo 105” accounting method to loan out risky assets at the time of reporting so as to improve its balance sheets ona short-term basis. The Lehman bankruptcy lawyer labelled this as “accounting gimmicks” earlier this year.
The Bank says UK institutions should not “window dress” their accounts by using short term financial transactions to change accountancy values.
It says: “End-period information can be unrepresentative of banks’ behaviour during a reporting period for two reasons. First, due to intraperiod volatility in banks’ normal business activity. Second, because of deliberate actions by banks to tailor financial reports at period end.
“Some of the funding techniques used in the years leading up to the crisis demonstrate clearly how point-in-time data can be unrepresentative in practice. For example, Northern Rock made extensive use of short-term wholesale liabilities to fund expansion of its mortgage book ahead of a securitisation.”
The Bank says rules must be amended whereby things like loans to and deposits from other banks and financial corporations, repo activity, funding via securities lending, derivative positions and trading activity, both on and off balance sheet are all clearly detailed in banks’ results.
It says: “it is in banks’ longer term interest to ensure that they provide sufficient information for investors to understand risk positions throughout the period.”
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