09 June 2014

BIS/Constâncio: Accounting and financial reporting by central banks

Mr Vítor Constâncio, Vice-President of the ECB, spoke on developments in international accounting standards; interaction between financial reporting and financial regulation; central bank balance sheets in stormy times; and central bank financial reporting and governance issues.

Mr Vítor Constâncio introduced four main topics of the ECB conference: developments in international accounting standards; interaction between financial reporting and financial regulation; central bank balance sheets in stormy times; and central bank financial reporting and governance issues.

On the developments in international accounting standards, the ECB supports the establishment of a single set of global accounting and financial reporting standards. This is vital for the sake of consistency, comparability and thus transparency. It is also important not only for investors and other stakeholders, but also with a view to banking supervision and regulation. Accounting information serves as a basis for various prudential measures, such as minimum capital requirements and the leverage ratio. In the EU, the new capital framework for banks that came into effect on 1 January 2014 (what is known as the "CRR/CRD IV"), and the supervisory approach within the Single Supervisory Mechanism (SSM), is aimed at harmonising prudential requirements and practices for all EU banks. This is commonly referred to as the "single EU rulebook" or the "single supervisory model". The coexistence of different accounting frameworks would obviously be inconsistent with this objective.

Nevertheless, the ECB understands that the IASB may have to go towards the finalisation of IFRS 9, even if a broader agreement cannot be achieved.

To pick out one particular issue, the ECB considers the more forward-looking loan-loss provisioning as a positive development. While acknowledging that the replacement of the incurred-loss model by the expected-loss model may be criticised as being judgemental and as allowing a considerable degree of subjectivity, it nonetheless has the advantage of being more forward-looking and, therefore, less pro-cyclical.

Furthermore, the ECB welcomes the Maystadt report on how to reinforce the EU's contribution to the IFRS and to the improvement of the governance of the European institutions developing these standards. The ECB broadly supports the enhanced role of public authorities in the new Board of the EFRAG, which would contribute towards ensuring that financial stability and public interest considerations are adequately taken into account in the endorsement process for IFRS.

The second part of the conference dealt with the interaction between financial reporting and financial regulation.

The ECB has been entrusted with the responsibility for banking supervision in Europe within the framework of the SSM. The SSM will provide for the aforementioned "single supervisory model", which will be applicable to all banks in the euro area. In the future, other EU countries may also decide to participate in the SSM. The ECB/SSM will formally take over supervision in November 2014.

The third part of the conference dealt with central bank balance sheets during the crisis, the financial crisis required unconventional monetary policy tools and liquidity support that had a considerable impact on the size of many central banks' balance sheets, influenced their risk profile and left marks on their financial buffers and profit and loss accounts.

The Eurosystem reacted to the financial crisis by increasing its intermediation in bank funding markets via an increased range of monetary policy instruments. Consequently the Eurosystem risk profile partially shifted and increased, from FX rate and gold price risk to credit risk related to domestic assets. Any related counterparty default risk is however mitigated by adequate underlying collateral which provides an additional guarantee. The operational framework was adapted accordingly - examples thereof are the extension of credit maturities, outright purchase programmes for securities and changes to the collateral framework.

The fourth and final part of this conference focused on central bank financial reporting and governance issues.

There is an increasing worldwide demand for transparency to be strengthened, also triggered by the financial crisis. This, in turn, impacts on financial reporting and how it is tackled, as well as on the way in which governance issues are presented.

One aspect that the ECB has paid particular attention to in recent years is the development of its management report. The management report is aimed at providing the ECB's stakeholders with comprehensive information on primarily issues with a financial impact such as portfolio management, the production of its financial accounts, various risk management aspects, financial resources and financial results, as well as related governance issues.

Full speech

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