Bank profits distorted by IFRS accounting rules, says Bank of England Governor

In his financial stability report, the Governor of the Bank of England has warned the so-called "incurred loss" system brought in by the International Financial Reporting Standards in 2005, which does not show poor loans until they fail, has led to banks failing to put aside enough of a cash cushion against bad loans.
"Inadequate bad debt provisioning can lead to an overly sanguine view of the resilience of the banking sector," the report says. It may also explain why banks are failing to meet the Project Merlin lending targets: "It can also tie up funding in assets generating low returns, potentially impeding the allocation of capital to the real economy."
Contradicting a report from the Department of Business last week, the reports adds: "This represents a change from the accounting regime UK banks followed at the time of previous recessions."
Sir Mervyn said the rules may be distorting bank results: "Much of the improvement in banks' profits since 2009 has been the result of a fall in provisions made against loans."
His conclusions support a campaign – led by City veteran Tim Bush and backed by The Daily Telegraph – that IFRS allows banks to hide the build up of dangerous risks.