Attempts to streamline accounting standards for banks are running into problems with Europe and possibly the U.S. But this holy grail is well worth pursuing. The current hairballs of rules confuse almost everybody. Investors should keep the pressure up on policy-makers on both sides of the Atlantic, otherwise accounting incomprehension is likely to be just as much a feature of the next crisis as it was of the last.
The International Accounting Standards Board, which sets standards for most of the world outside the U.S., has led the charge for simpler rules. It wants just two ways of valuing financial assets – down from the current four. One is to value them at cost; the other to mark them to market. In order to qualify for the "cost" treatment, the bank would have to jump two hurdles. First, the asset would have to be a "loan-like" instrument producing contractual cash flows. Second, the bank itself would have to be in the business of holding assets in order to collect such cash flows rather than trading them.
The IASB's approach is eminently sensible. However, it faces problems on two fronts. One is from Brussels, the IASB's main sponsor. Some European Union members, such as France, think the IASB is relying too much on mark-to-market accounting. The European Commission, which had previously urged the IASB to fast-track its proposals, is now saying it is going to wait before deciding whether to adopt them. Hopefully, delay is not a code for obstruction.
At the same time, the IASB is waging a war abroad. But, in the U.S., its problem is exactly the opposite. The Federal Accounting Standards Board thinks all assets should be marked to market. FASB hasn't formally started its consultation process, so there is a chance that it will change its mind. But if it doesn't, the resulting mish-mash will require the wet flannel treatment. The number of financial professionals who properly understand even one set of bank accounting standards is small. Those who can understand two are as rare as hen's teeth. If the world's policymakers let investors down on this issue, they will rue the day.