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Banks must come clean on accounting
07 February 2010
Our banks have so far shown no signs of owning up to the likely losses on their balance sheets.
The Nama process must expedite this, if we are to have any hope of returning to a properly functioning banking system over the next couple of years.
Rather than accounting transparently for the banks’ losses, all we have heard recently are details of various accounting manoeuvres being used to avoid doing this.
Both AIB and Anglo Irish Bank have sold large portfolios of properties to Green Property in away which avoids them booking large losses but - we can only assume - leaves them still exposed. In AIB’s case, the money involved was believed to exceed €800 million, all loaned - incredibly - to a Greek fraudster.
In Anglo’s case, the gambit is to sell on a portfolio of investment property which is also well under water. In both cases, the transactions are structured to avoid the losses being taken immediately onto the banks’ balance sheets.
It is up to others, to auditors and to the Financial Regulator, to decide whether these transactions complied in full with accounting and regulatory requirements. In our view - whatever about the letter of the law - it seems incredible that AIB investors were not told about this when the bank discovered it in late 2008.
The Anglo transaction looks like away to avoid taking more losses onto the books of this state owned concern. Given that the taxpayer is funding this bank, we would, please, like all the details of this transaction immediately, so that we are aware what liabilities we are taking on for the years ahead.
These transactions are more of the same delay we have seen over the past year in facing up to the real extent of the losses on the bank balance sheets. It may suit bank shareholders to do this. After all, the longer they can draw out the process, the better, as profits earned on ongoing operations can gradually repair damaged balance sheets.
This is, however, the route to the creation of the zombie bank, slowly writing down its losses and not strong enough to grant new loans on a normal basis. From the point of view of the economy generally, it is crucial that the losses are faced up to and the banks properly recapitalised, even if this means wiping out much - or even all - of the shareholder value.
How the Nama process is now conducted will tell us much. Does the government really have the stomach to face down the banks, ensure the losses are properly accounted for and that a recapitalisation programme is implemented? Or will we see more fudge and delay? The banks will be privately warning the government about the danger to the state’s reputation, the need for continuity and so on. In truth, they are only trying to save their own skins.
The needs of the wider economy simply must take priority.
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