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Outside auditors should check bank capital, UK industry body says

[LONDON] Asking outside auditors to vouch for the accuracy of a bank's key measure of health could help restore investor trust in the sector, a London-based accounting body said on Wednesday.

The Institute of Chartered Accountants in England and Wales (ICAEW) kicked off a public consultation on how accountants could check on bank capital ratios, a measure of capital a lender holds in relation to risky assets such as loans.

The ICAEW was asked by the Britain's banking supervisor, the Bank of England's Prudential Regulation Authority, to examine how independent scrutiny could work in practice.

"We need capital ratios to be credible," PRA Chief Executive and BoE Deputy Governor Andrew Bailey said in a statement from the ICAEW.

"We are interested in understanding whether audit of these measures could help contribute to a process of assurance that enhances their credibility," Mr Bailey added.

Although external accountants audit a bank's financial statement, capital ratios included in them are not checked in the same fashion and fully audited ratios would be a world first.

"Capital ratios are probably the most looked-at numbers that banks produce, and yet they are not audited," said Iain Coke, head of ICAEW's financial services faculty. "We need a consistent way to deliver this that meets different users' various needs."

Britain's big banks are audited by one of the Big Four accounting firms, KPMG, EY, Deloitte and PwC, which also sell other services to lenders.

The auditors themselves have come under intense scrutiny from policymakers since they gave banks a clean bill of health just months before many lenders had to be rescued by taxpayers in the 2007-09 financial crisis.

Regulators have uncovered large variations in how much capital banks set aside to cover similar assets, meaning consistency in auditing may also be challenging.