Today I read that banks profits are currently rising because of “Fair Value Accounting of Own Debt”. I immediately sense that this has nothing to do with good lending or customer service.
I think I understand this as follows. Banks have their own debt, but if the markets think they are a bit shaky, the value of that debt decreases and can be bought in the market for less than the issued value; in other words banks have to pay less to buy back their debt. That means they will spend less and their profits might go up. It’s hypothetical – but they can do this valuation and run it through their accounts. So that means the worse a bank does, the lower the value of their bonds, the higher their potential profit. There is only one word for this… “bonkers”
If you think I am making this up, read the financial press (ok I simplified it a bit for the purpose of this blog). Apparently we are talking some £10bn of profits resulting from these accounting procedures.
Can you imagine any of our clients or in fact any small business going to a bank suggesting that the above accounting procedures should be considered when applying for finance. We all know what the answer will be. Should the banks and perhaps the government focus on abolishing all these rules, and for the avoidance of doubt not introduce new ones? Maybe transparency will create conditions for the economy to move forward and grow?