A recent article in the Telegraph has challenged conventional wisdom surrounding the financial crisis:
“the controversial International Financial Accounting Standards (IFRS) had allowed banks to hide risks so that profits and bonuses were inflated”
“the accounting standards allowed the banks to look far more profitable than they were. The financial crisis exposed the shortfall that had built up.”
States testimony to the House of Lords Economic Affairs Committee. First we don’t see the risks on the banks balance sheet, then “oh-o” next we see a tidal wave of risk. Given that banks can self determine the value of assets held on their books (Mark to Model or Fair Value, rather than Mark to Market) the scope for banks to unduly influence, even manipulate, the value of assets on their books is considerable.
The testimony referenced in this article just gives more weight to the argument that the banks were indeed insolvent during the crisis rather than the publicly portrayed line of having “liquidity” difficulties.
Regulars to this blog will know that one of the key methods identified for hiding / misrepresenting finance risk, was brought about by de-regulation of loan handling; Originate-to-distribute, otherwise known as Securitisation: