Bank regulation a worry for Ireland's legacy debt negotiations
In 2005, the EU endorsed a set of rules – International Financial Reporting Standards (IFRS) – that compelled certain banks (particularly in Ireland and Britain) to conceal losses on certain troubled loans until they are realised, a first in the history of company law whose rules are generally designed to protect shareholders.
A legal opinion from Martin Moore QC argues that the EU may not have had authority to do this. The architects behind the controversial rules admit they were overly complicated, rushed together in an “inelegant” manner and are not fully understood by anyone.
Hedge funds seem to have realised this, the Irish public has not, and this may explain why the EU is anxious to protect bank creditors but burdening the Irish taxpayer in the process.
Bonus-hungry bankers, however, have backed the EU rules. This is understandable, given that since 2005 they were able to inflate profits and bonuses which were paid even while bankrupt – something that wasn’t possible before.
A Bank of England executive claims banks have ignored the “true and fair” requirement of company law because of unrecognised losses and this month predicted that bonuses and gold-plated salaries of bankers would fall dramatically.
A consortium of major pension funds in the UK has started to lobby strongly to reverse the controversial EU rules in line with what the Bank of England recommends. It has written to commissioner Michel Barnier warning that the process by which the EU endorsed the concealment of losses is contrary to EU company law and opposes what the EU agreed when countries such as Ireland signed up the amendments into national legislation.
Concealment of losses
The consortium has issued two position papers, one on the accounting rules which permit the concealment of losses and a second on reforms needed in the audit industry. The consortium is taking a keen interest in Ireland’s presidency of the EU this year, hoping to win the backing of Irish politicians in its campaign.
This week, it was reported in the Daily Telegraph that the office of commissioner Barnier has agreed to a review.
If the Bank of England’s recommendations are adopted, the EU may have to admit that its contribution to the Irish banking crisis is a little more than first imagined.
In 2008, Brian Lenihan received advice that Irish banks were solvent. Like shareholders and regulators, Lenihan was most probably not aware that the report reassuring him on this point legitimately concealed losses, exploiting loopholes that the EU created. For different reasons, the UK’s Bank of England wants to resolve this urgently.
Cormac Butler was a contributor to Lessons for the Irish Government on Basel II and Accounting Failures, Vol 6, 11-14, Journal of Risk Management in Financial Institutions, Henry Stewart Publications