Banks Are Impossible for Anyone to Understand
If even the auditing profession can't police the opaque world of risk-weighted assets, what hope is there for investors and regulators?
I give up.
Photographer: Topical Press Agency/Hulton ArchiveA simple lesson we should have learned from the financial crisis is that complexity begets abuse, and undermines stability. Yet the key measure we use to determine banks’ health is so fiendishly difficult to understand that outsiders have no choice but to accept what we’re told by the lender.
That’s the conclusion of a broad U.K. government review of the audit industry unveiled this week. Donald Brydon, the former chairman of London Stock Exchange Plc who ran the review, considered whether accountants should be brought in to verify how banks calculate the all important “risk-weighted asset” measure. Alarmingly, he concluded that there was no point because even trained auditors would struggle to get their heads around these calculations, unless banks employed an army of them. If that’s true, then what hope for ordinary shareholders or bank supervisors?