Bank of England: Banks must stop fudging figures to look better than they really are



Banks should stop 'window dressing' their accounts by manipulating transactions to flatter their results, according to the Bank of England.

It wants institutions to own up to flurries of short-term activity around their reporting dates that aim to make their figures look better than they really are.

The Bank, which is being given back the power to regulate banks, warned that if institutions continue to 'distort their financial reports, explicit sanctions on banks, and their boards, could be considered'.

Bank of England in London, Britain, 21 April 2008. The Bank of England has announced details of a 63 billion euro plan to help prevent the credit crisis causing more damage to the British banking system and economy. The package, under which banks for the next three years will be able to swap their riskier mortgage-backed assets for rock-solid government bonds, is seen as the most ambitious in the bankës history. EPA/ANDY RAIN

Squarely in the Bank's sights are a range of transactions including those involving loans to and deposits from other banks, funding through the lending of securities and the use of derivatives.

In its latest Financial Stability Report, the Bank explicitly cited failed American investment bank Lehman Brothers as an example of an institution that routinely window dressed its figures.

It warns that relying solely on figures at the end of reporting periods can cause problems, not only because of business volatility in between times, but because of 'deliberate actions by banks to tailor reports at period-end'.

The Bank suggests that auditors 'could be given an explicit responsibility to check for and report on signs of window-dressing actions'. It fears window dressing could damage investors' confidence.

Between now and the end of 2012, British banks need to refinance-750 billion of loans. The Bank wants as much of that as possible to come from domestic investment institutions with low borrowings, rather than from highly-geared, foreign investors making short-term investments.

But the Bank fears this will not happen if domestic investors lack confidence in the reporting of financial institutions.

It also wants banks to issue longer-term debt, which is more appealing to the domestic market as it seeks a durable investment, and to set out a timetable for debt issues, as has long happened with Government bonds, or gilts.

A spokesman for the British Bankers' Association said: ' British banks fully understand the need for transparency and are committed to the highest possible accounting standards.'

It is understood that the BBA believes the problem of window dressing of accounts is largely historical.