Sir, Last week Andy Haldane, chief economist at the Bank of England, admitted that economists had failed to predict the financial crisis, and compared the situation with that of ill-informed weather forecasting in 1987—the “Michael Fish moment”.

Sir John Vickers (Letters, January 10) added that, aside from better forecasting, the governmentmust also “weatherproof” the banks by ensuring sufficient capital is held for the inevitable “rainy day”.

But better forecasts and better weatherproofing both depend on a deeper problem being resolved: the poor quality of the numbers we are relying on to tell us what banks’ capital actually is. Is the stated “capital” in fact capable of absorbing lending or trading losses that inevitably come in a downturn?

At the heart of the crisis would appear to sit faulty accounts and unreliable audits. In the EU alone, between September 2008 and the end of 2010,more than 300 banks went cap in hand to governments for support—in the formof capital injections, asset relief, liquidity aid or debt guarantees. Few banks were identified as having insufficient capital at the time.

The fact is that bank accounts — drawn up according to IFRS accounting standards—showed “profit” and “capital” that overstated their true strength. Supplementary regulatory disclosures of capital under the Basel framework help little as they lean heavily on these faulty accounting numbers, and are themselves unaudited.

The government’s green paper to strengthen corporate governance provides an opportunity to tackle these problems: unless accounting rules are changed (or supplemented) to ensure a reliable—and not overstated—viewof companies’ profit and capital, it will be hard to improve executive accountability, ensure appropriate pay and promote long-term stewardship.

Specifically, companiesmust disclose what profit has been realised and what hasn’t, and therefore what can be safely distributed as dividends without eating into capital (cash resources and regulatory requirements permitting).

Without these changes, how will we be able to see the next crisis coming?

Natasha Landell-Mills

Sarasin & Partners LLP

Councillor Kieran Quinn

Local Authority Pension Fund Forum

Eric Tracey

GO Investment Partners LLP

Roger Collinge

UK Shareholders’ Association

Robert Talbut

Pension fund and charity trustee

Frank Curtiss

Pension fund and charity trustee

Letter in response to this letter:

Picture of risks in banks’ portfolios is still fuzzy / From Ray Soifer, Green Valley, AZ, US

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