Back in 2013, I met Hans Hoogervorst, chairman of the International Accounting Standards Board. In a boardroom surrounded by news editors and journalists, Hoogervorst began with a mea culpa on bank accounting, and announced the IASB’s solution.

The mea culpa was necessary because the subprime and Eurozone crises between 2007-12 had exposed a credibility problem in the accounting profession. Under the old rules (IAS 39), banks were allowed to treat loan portfolios as healthy until evidence of impairment emerged.

As scandals such as HBOS, Bankia and Dexia showed, banks were far too slow in recognising such impairments, while receiving a clean bill of health from auditors. Scandalously, this enabled the banks to raise money from investors shortly before becoming insolvent.

Hoogervorst’s solution became known as IFRS 9, and would require banks to glance into a crystal ball before publishing investor updates on their loan portfolios. In addition to impairments already observed, banks would have to state how much they expected to lose on their loans in the future. If the economy tanked, that estimate would rise, and this would be recognised as a loss in earnings.

Seven years after that briefing, IFRS 9 went live on 1 January 2020. Now, in the first quarter’s results, its impact is finally being felt. Even without Covid-19, the banks had warned they were going to take a hit, just from modelling the impact of a normal economic cycle on their portfolios. By 31 March, it was clear this was going to be no ordinary economic cycle.