European banks would be less scary if they were in the US February 22, 2013 at 6:36 am

Matt Levine is wrong. He has a post U.S. Banks Would Look Scarier If They Were European Banks which is entirely the wrong way around. Yes, if US banks reported under IAS their balance sheets would be bigger, but that’s because IAS is wrong and US GAAP right. The real problem is HSBC, Deutsche and Co.’s balance sheets are swollen by the utterly idiotic accounting for derivatives recently imposed by the IASB. Fortunately ways around that are being developed, as we will hopefully see shortly.

9 Responses to “European banks would be less scary if they were in the US”

  1. Levine also slightly overeggs the covered bond/RMBS distinction. Yes covered bonds are formally different from RMBS, not just from an accounting perspective. But most RMBS is on balance sheet in Europe as well.

  2. Punk kid. Who does he think he is?

  3. DEM-Great minds. I tweeted the exact same thing in response to the Levine article a couple of days ago.

  4. Wait that’s what I said, no? I said that if US banks reported under IAS their balance sheets would be bigger, but that “reflecting net, not gross, positions for derivatives subject to an enforceable master netting agreement is right, and not doing that is wrong, which is a good argument for doing it the American way.”

    The headline was a little tongue in cheek but I think we agree on the substance.

  5. I see your conclusion, but where’s the argument? I think you’re whistling past the graveyard.
    http://bettingthebusiness.com/2013/02/22/hiding-risk-by-netting-exposures/

  6. The amendments to IAS 32 didn’t significantly change the approach for most bilateral derivatives except for clarifying a few relatively obscure topics and ambiguities in the wording, so I’m not sure why you refer to them as ‘recently introduced’.

    As for whether the approach is ‘idiotic': I can’t think of any other area of going-concern accounting where assets and liabilities are offset merely because there is an enforceable offset in bankruptcy. Few people would want to offset secured loans against their collateral or finance leases against the leased item. Arguably those items have a much closer connection than exists between two derivatives that happen to have the same counter-party but have different maturities and different underlying asset classes.

    General-purpose going-concern accounting standards don’t have the same aim as banking regulator standards and there is no reason why they should always use the same basis of accounting. Counter-party credit risk may be a key focus for the regulator, but in terms of reporting financial position and performance it is not the only consideration.

  7. General-purpose going-concern accounting standards don’t have the same aim as banking regulator standards and there is no reason why they should always use the same basis of accounting.

    But bank regulatory capital isn’t calculated using IFRS balance sheets in Europe anyway.

  8. But bank regulatory capital isn’t calculated using IFRS balance sheets in Europe anyway.

    That’s along the lines of what I was trying to argue. Net presentation may be perfectly appropriate for showing counter-party credit risk for regulatory purposes while not being appropriate for general-purpose accounts where credit risk mitigation is not the central issue. There should be no expectation of a common approach, any more than we should expect taxable profit to equal accounting profit.

  9. Well said, JH. General purpose financial reports are different from prudential regulatory in what they present. Both forms of reporting are important but serve different needs. In addition, the revised disclosure in IFRS for offsetting will help make information comparable with US GAAP.