Struggling banks should not use vague promises of state aid to keep investors in the dark about their fragility, according to new UK guidance aimed at avoiding a repeat of the confusion experienced during the financial crisis.
The Financial Reporting Council said on Wednesday that bank directors and auditors should not rely on generalised words of support from central bankers or the government when deciding whether the institution remained a going concern.
“Directors and auditors are responsible for making their own judgments about the future solvency and viability of the bank,” it said. A “nod” or “wink” implying state support was not enough, added Marek Grabowski, FRC director of audit policy.
The updated FRC guidance follows controversial secret talks between UK bank auditors and the government at the height of the crisis.
Companies must declare in their accounts whether they view themselves as a going concern, meaning they have enough cash and access to funding to survive for at least a year.
They must also tell investors if there is a material uncertainty about this status, although such a disclosure would probably be so catastrophic for a bank that regulators would intervene first. Auditors verify the going concern assertion.Requiring the banks to provide ultra transparency ends the reliance on a wink and a nod from bank regulators.
Given that the bank regulators have all said that the banks are currently solvent, one of the findings of the stress tests, now is the perfect time to have them begin providing ultra transparency as there should be no chance of a catastrophic failure by a bank when its exposure details are disclosed.
Once ultra transparency is in place, the market votes every day on whether a bank is a going concern or not.
Before green-lighting their clients’ 2008 accounts, however, UK bank auditors asked the government for broad confirmation it would continue to prop up ailing financial institutions.
Lord Myners, then City minister, responded by saying the government would take “whatever action is necessary to maintain financial stability, protect depositors and protect the taxpayer”.
The implication that banks could be described as going concerns because of the expectation of sustained state backing was subsequently ridiculed as “Alice in Wonderland” logic during House of Lords hearings....However, banks have in fact received sustained state backing since the beginning of the current financial crisis.
The FRC ... is trying to meet the needs of investors for candid information without undermining confidence in the banking system.Ultra transparency both meets the needs of investors for candid information and improves confidence in the banking system.