Sir, In addition to those described by Patrick Jenkins in “Why is it taking so long for Europe’s banks to recover?” (Inside Business, November 10), another reason for the relative weakness of European banks is the limitations placed on them by international financial reporting standards. Since the 1970s, US GAAP has required banks to earlier recognise loan losses, when they are in “probable” default. In contrast, IFRS used by European banks only require recognition when the loan is already in default.
This may not seem significant, but the implications are far-reaching. In the years following the 2008 crash, US banks were much faster to clean out their loan books of non-performing loans, in part as a result of more rigorous and forward-looking accounting requirements. Needless to say, many European banks remain weighed down by toxic assets on their balance sheets despite the fact that a more forward-looking model would likely speed up their return to health.
The debate continues about whether the International Accounting Standards Board’s “three stage” approach to impairment is the most sensible, given the risk that the “lumpy” nature of losses will render the 12-month approach inadequate and that auditors may find it difficult to assess when a “significant increase in credit risk” has taken place.
However, when considering why European banks are struggling, we should acknowledge the negative effects of restrictive accounting standards that prevent banks from cleaning themselves up.
Syed Kamall MEP
Conservative, London, UK
Sven Giegold MEP