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39 Steps: Behind the Curtain

by Francois Masquelier, Head of Treasury, Corporate Finance and ERM, RTL Group, and Honorary Chairman, EACT

Bankers recently criticised accounting rules, blaming them for deepening the financial crisis. Can an accounting standard be responsible for a credit crisis? How can the IASB respond to this situation? The CESR has its own view on these IFRS issues based on research amongst top European companies.

Bankers call for review of financial rules

In January 2009, the Chairman of HSBC, Stephen Green said that the current financial rules must be “fundamentally revised”, as they had deepened the financial crisis. He continues that the capital adequacy regulations and fair value accounting were “well intentioned” but had proved to be inadequate. Some even said that these rules encourage banks to build up their capital instead of lending money to their customers. He thinks, as many fellow bankers do, that “Fair value accounting has added considerable volatility to results, only part of which is economic…” Many bankers have said that that financial rules have worsened the crisis by using fair value accounting to determine the value of assets whose market price cannot be determined.

Logically, the accounting translation of a financial instrument should not be responsible for its quality and current valuation.

Although this position is understandable, it is too easy to blame an accounting rule when bankers may also have manipulated instruments they did not understand, and did not fully assess risks and potential volatility.