Bank reporting: no accounting for taste

Plan B, by definition, is no one’s first choice. But for accounting rules it is becoming the default option. Consider banks’ reporting of their derivatives holdings. US rules allow banks to present net exposures, while European banks, following international rules, publish gross numbers. If the five biggest US banks by assets had been made to switch to international rules, as America’s standard-setter had been considering earlier this year, their balance sheets would have swollen by about 40 per cent overnight. Last week, though, plan B was spelt out: no switch, and even longer footnotes.

In an era when bank leverage is critical, a single accounting format would have made comparisons much easier. And convergence on the international standard would have been desirable. While netting can provide a simple snapshot of a bank’s credit risk, gross figures give a better understanding of broader market risk and leverage.

Such convergence would not have changed the broader economic picture: US banks are far smaller actors in their own economy than their counterparts in Europe. But at the level of individual banks, the details are significant. Credit Suisse analysts estimate that 95 per cent of the impact of the rule change for S&P 500 companies would have been borne by Bank of America Merrill Lynch, JPMorgan, Morgan Stanley, Goldman Sachs and Citigroup. They would, of course, have exceeded their regulatory leverage ratios. Yet it is a shame that US accounting is being made to fit leverage ratios, and not the other way round.

The US standard-setter says its U-turn was in response to investor preferences. The upshot of the decision, however, is that both bodies now require companies to report on their usual basis, while providing additional disclosure on the other basis. Dedicated investors will poke around in the small print. But the risk is that many will be misled by accountants’ failure to resolve their differences.

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