Central Bank considers compulsory quarterly reports

 

THE CENTRAL Bank is considering a proposal to compel Irish banks to publish quarterly financial reports to restore market confidence and bring their reporting in line with international banks.

The proposal is being examined as part of wider reforms on how the banks report their financial results under accounting rules and how banks might be more realistic on the reporting of expected future losses on their loan books.

The Irish banks currently report financial results every six months for their half-year and full-year performances. Under proposals being considered by the Central Bank, the banks would be forced to publish quarterly figures from 2012.

The aim of the changes is to force banks to make more detailed disclosures on performance as a result of the high degree of public ownership in the banks, according to sources familiar with the plans.

The Central Bank is considering how to avoid the staggered reporting of losses, which has been a contributory factor in undermining the Irish banks, and their ability to borrow and attract outside investment since the start of the banking crisis in 2008.

Under International Financial Reporting Standards, the accounting rules followed by Irish banks, the institutions can only make a provision against a loan when it has become impaired. This was blamed for exacerbating the crisis as banks were not required to make provisions against loans that appeared vulnerable to impairment.

As a result, this meant banks reported large profits during the boom times but had insufficient capital to meet losses when the market turned and large numbers of loans soured.

The Central Bank is looking at ways of moving the banks to an “expected loss” from an “incurred loss” financial reporting model under proposals being considered.

Details of the possible changes were outlined in yesterday’s Financial Times which reported that the Central Bank was looking at ways of how the banks could report bad loans up-front to address the expected losses at the banks.

Jonathan McMahon, the director of financial institutions at the Central Bank, was quoted in the newspaper saying: “Kicking this can down the road to perpetuity is not a solution.”

The latest €24 billion capital target set by the Central Bank that will “over-capitalise” the banks by next month will allow them to book more expected losses earlier.

“This will give us the capital headroom to play with to make changes,” said one source.

The Central Bank is considering introducing the new “expected loss” model in the bank’s reports for the 2012 financial year to try to bolster market confidence. Further details of the Central Bank’s plans may be outlined on Thursday when it publishes an update on last year’s paper on the changes to banking supervision.

Central Bank governor Patrick Honohan last year criticised “backward-looking” accounting on loss provisions, saying that it raised doubts in the minds of investors on other parts of the accounts.