By Huw Jones
LONDON (Reuters) – Momentum is building for independent checks on the capital buffers of banks, a senior accounting executive has said, with Metro and Co-operative banks a reminder of what happens when things go wrong.
Following a request from the Bank of England, the ICAEW, a professional accounting body, designed a framework for independent checks on how banks calculate their ratio of capital to risky assets, a closely-watched measure of health.
Michael Izza, chief executive of the ICAEW, said the idea of independent checks was gathering momentum.
“We have been talking to accounting firms about whether or not they have had any interest in using this framework to do specific pieces of work for banks, and we hope to share our insights in the next few months,” Izza said.
Metro is seeking a rights issue for 350 million pounds to repair an unexpected dent in its capital ratio after admitting an error in how the ratio was calculated.
The error was discovered by the Prudential Regulation Authority (PRA), the BoE watchdog that asked the ICAEW to come up with its framework for checking ratios.
“The PRA has not endorsed or mandated the framework but they have been supportive of it being done,” Izza said.
Checks could be done by external accounting firms, by a bank’s internal auditors, or by using a Section 166, whereby the bank is required by its regulator to hire an external firm to make the checks, Izza said.
PRA’s current rules do not require external auditors to provide assurance on capital ratios, and there is little sign that Metro’s error is a sector-wide issue.
A PRA spokeswoman noted the watchdog’s response to a report in March into the near demise of the Co-operative Bank in 2013. The report recommended that capital levels of banks should be externally checked.
The PRA said it agreed with this recommendation and will consider whether to introduce more formal third-party reviews after considering costs and benefits, whether all banks should be subject to such checks, and if the findings of checks should be published.
European Union rules for insurers already require independent “validation” of capital calculations, such as through the use of outside actuaries.
A review by former London Stock Exchange chairman Donald Brydon of auditing standards is also looking at checks on bank capital ratios and will report back by the end of the year.
(Reporting by Huw Jones, editing by Ed Osmond)