LONDON (Reuters) - Like the myriad approaches governments are taking to tackle the coronavirus crisis, the way the world’s top banks are calculating their potential losses also differs widely, with puzzling outcomes for investors.
These discrepancies are rooted in the interpretation of new accounting rules called IFRS9, which have been designed to promote transparency and stability by making banks account for loan losses earlier.
But rather than solving problems seen during the 2008-9 financial crisis, when markets were blindsided by a sudden deterioration in bank balance sheet health, IFRS9 is confounding the same investors they are meant to help.
While the rules aim to provide a more realistic and timely picture of bank exposures, some have described their application as more art than science. Critics go further; complaining the system is complex, opaque and vulnerable to abuse.
“It makes a mockery of financial reporting if banks can report better numbers simply by assuming a more benign outlook -either intentionally or unintentionally,” Ed Firth, banking analyst at KBW, told Reuters.
A Reuters analysis of first quarter regulatory filings highlights the extent to which banks are basing their estimates of how bad loans will rise on differing economic forecasts.
For example, Barclays (BARC.L) used an 8% fall in UK GDP and 6.7% unemployment as its baseline scenario for 2020, while fellow British lender Lloyds Banking Group (LLOY.L) had a 5% contraction in GDP and 5.9% unemployment.
Barclays booked a larger-than-expected 2.12 billion pound ($2.63 billion) credit impairment charge, while Lloyds set aside 1.4 billion pounds. Diverging economic forecasts don’t explain all of that variation, but they make it harder for investors to
