Plans are to be drawn up to give more confidence about the way banks measure their financial strength in the wake of the 2008 crisis.
Accountants are to devise standards to measure a key element of the way banks assess how much capital they need to hold, in an attempt to address the concerns of investors and regulators about methods currently being used.
The move by the Institute of Chartered Accountants in England and Wales, comes as the banking industry awaits the results of the first annual health check of its financial strength by the Bank of England.
The outcome of tests on seven banks and one building society are to be released at 7am on Tuesday and could have repercussions for how the businesses operate in the years ahead.
The ICAEW said it was beginning work on drawing up standards for the way bank capital is measured, after discussions with the Bank of England’s Prudential Regulation Authority, which regulates the major banks and insurance companies.
It is looking at devising ways to verify how banks measure their risk-weighted assets (RWAs) – a key component in their capital ratios which gauge banks’ abilities to withstand losses. The ICAEW said there was not a common way of assessing the risk attached to loans and that it was planning to address this situation.
“If a bank wanted to flatter its market image at present, it is most likely to be through manipulating its RWAs. Some of the lack of comparability relates to the amount of subjectivity in the capital rules themselves,” said Iain Coke, head of the ICAEW’s Financial Services Faculty.
“The time is right to look at providing assurance on RWAs,” he said.
The accountancy body had raised concerns during the financial crisis, about the fact that capital ratios were not audited. It was now finding that investors had less trust in the capital numbers being published by banks.
A formal consultation is expected to take place in early 2015.
The Bank of England’s tests are on eight major lenders. Four of them – HSBC, Barclays and bailed out Royal Bank of Scotland and Lloyds Banking Group – have previously been subjected to the tests conducted by the European Banking Authority, and four were not (Co-operative Bank, Santander UK, Standard Chartered and Nationwide building society). The Bank is assessing their abilities to maintain a so-called tier-one capital ratio of 4.5% after being subjected to a number of hypothetical scenarios, including a 35% fall in house prices and a rise in base rates to above 4%.