UK insolvency compliance consultants Compliance On Call today called on the banking community, the FSA, the Bank of England and the government to stop unfair ‘off balance sheet’ treatment of distressed debt that hides the underlying value of bank assets.
Although recent events at Northern Rock are an overreaction and the UK banking system is still solvent and robust, Compliance On Call considers that banks are vastly overvaluing their assets with the assistance, or at least the passive acquiescence of their regulators and the government. Compliance On Call director Bill Burch said, “There are very real parallels between the current valuation of bank reserves and the complex debt packages that brought Bear Sterns to its knees in the USA. Our banking system values equity at its open market value, making no allowance for the fact that the housing stock is considered in many quarters to be overvalued by as much as 20% and completely ignoring the potential for many such assets to be realised only through repossession, potentially knocking up to a further 30% off their realisation. Accordingly, the Bank of England is accepting collateral on liquidity loans that could be worth as little as 56% of its face value.”
He went on to attack the FSA’s claims that Northern Rock and other banks had a strong loan portfolio. “Although there is nothing like as much sub-prime debt in the UK as we saw in the States, the regulators here allow banks to keep distressed debt that is in a Debt Management Plan (DMP) or informal repayment arrangement on their books at full value when they will, at best, take many years to realise and in most cases will never be fully repaid. Formal insolvency procedures, such as Individual Voluntary Arrangements, have to be recognised as write-offs on approval and we have seen a massive rise in opposition to IVAs in the last year as banks like Northern Rock, Capital One and HSBC go to extraordinary lengths to hide the damage that is eating away at their loan book.”
Compliance On Call has called on the Government, the FSA and the Bank of England to introduce the following measures to require more transparent disclosure of banks’ underlying assets:
Equity values should be shown properly weighted, to reflect the likelihood of default, to allow for the cost of repossession and the reduced value likely in a forced sale scenario.
All debt subject to informal arrangements or debt management plans where the expected repayment period exceeds 5 years should be valued in their accounts at a maximum of 5 years’ repayments, with the balance written off as a bad debt provision.
Bill finished by saying “The banks are currently obtaining money from the Bank of England against asset valuations that they know, or ought to know, are inflated, which cannot be correct.”
Information for editors:
Compliance On Call was set up in July 2005 to provide insolvency compliance support services to UK Insolvency Practitioners. In October 2006 Compliance On Call issued a paper about Individual Voluntary Arrangements, followed by a draft set of standard terms and protocol that became the basis for proposals now being pursued by the whole industry under the joint leadership of the Insolvency Service and British Bankers’ Association.
There has been a massive growth in consumer debt in the last ten years. Latest figures suggest that personal debt is rising at £1bn a month in the UK and there are now thought to be millions of families who owe so much that that they have no way out other than some form of insolvency procedure.
Debt Management Plans are an arrangement between a debtor and one or more creditors. They have no basis in statute and the terms are entirely flexible, offering no protection to the debtor. Because they do not include an element of debt forgiveness and may not even, on occasions, freeze interest, financial institutions can show them in their accounts at full value without any bad debt provision.
Individual Voluntary Arrangements are a statutory alternative to bankruptcy. The debtor makes proposals to all of his/her creditors after receiving advice from a Qualified and regulated Insolvency Practitioner. If the proposals are approved they are legally binding on creditors and the debtor. Because interest is frozen and the arrangement often includes an element of debt forgiveness, financial institutions generally write down the debt on approval of an arrangement.
