Basel blows out Deferred tax assets

Posted on December 18 2009

The Basel committee on banking supervision has ruled deferred tax assets are not part of a bank's tier one capital that underpins their solvency.

That's eminently sensible.

What is mad is that they ever were.

Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:

There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.

You can subscribe to this blog's daily email here.

And if you would like to support this blog you can, here:

2 Responses

Richard says:

December 18 2009 at 6:52 pm

Richard

Can you give some more detail to back up your sweeping statement here? I know that you’re not a fan of deferred tax accounting, but what is wrong, in a general sense, of being able to book a DTA in respect of a loss where that DTA will be reversed in a (near) future period? Does it not follow that if a DTA were not booked in respect of a loss then the profit or loss for the period would be understated/overstated for that period. Then when the loss is utilised so that a future tax liability is extinguished in a future period, the profit or loss for that period is overstated/understated by the same amount as in the earlier year.

I am not discussing exotic loss planning here, just normal losses that may be incurred. The effect of ignoring DTAs is to increase volatility for banks – something that we want to avoid at all costs. The policing of whether DTAs can be counted within Tier 1 capital is the job of a beefed up regulator, using an independent expert to test management’s assertions that the DTA is recoverable.

Richard
Richard Murphy says:

December 18 2009 at 8:12 pm

But banks do not disclose when the DTA is recoverable – they just have think it is – and discounting is not applied

This is living in the land of make believe – as most tax accountants will tell you all deferred tax accounting is. At best it is a black art

And in current environments with losses around are those assets going to be recovered: who knows?

The only rational conclusion is if you want robust banks you exclude assets of dubious worth and uncertain timing as to realisation

Richard