Professor Eamonn Walsh:

Things are a little different in the United States. There is a different regulatory environment and a different financial reporting environment. Comparisons between the US and Europe are difficult to make given our different environments. It is difficult to establish what might be transparent reporting and what the bank should be reporting. One would like to see good disclosure about the risks financial institutions have. The international Financial Stability Board has issued extensive guidance on the types of disclosures banks should make. This considers credit risk and involves extensive disclosure.

The second issue is the roll-up of interest. This is not apparent under international accounting standards. Under US accounting rules, there are various regulatory overlays to help us to establish how much cash interest a financial institution is receiving. Australia, which uses the international financial reporting standards, requires banks in Australia to tell the amount of cash interest they have received. It is quite possible to take international accounting rules and use it to basically insist the rules are applied in a particular way that involves disclosure of cash interest received. That would be very helpful in dealing with the interest roll-up issue. It gives users an immediate indication of what is being rolled up and the risky loans in it.

Outside of international accounting standards, one area where this is quite transparent is in Russian banking. The Russian banking regulator has a requirement that people say what is the amount of cash interest being received. I see that as being key.