11 December 2018

IASB's Hoogervorst: Are we ready for the next crisis?

Mr Hoogervorst began his speech by outlining the global situation financial situation.

“One could argue that the global economy is caught in a classical debt trap. Debt is high because interest rates are low. At the same time, interest rates are low because debt is so high. A lot of debt can only be serviced while interest rates remain low, so it is very hard to return to monetary normalcy. Central banks are very cautious with raising interest rates, because they are fearful of accidents along the way. “

Mr Hoogervorst´s prediction is that—“even if we continue to muddle through as we are now—major accidents will be hard to avoid. It is very unlikely that the huge mountain of debt that we have created can ever be repaid in an orderly fashion.

So the question—are we prepared for the next crisis?—seems to be more than justified.

On this cheerful note, let’s turn to the question of whether accounting standards are fit for purpose in a new financial crisis.”

“Both the IASB and the FASB reacted to the financial crisis by replacing the incurred loss model for loan losses with an expected loss model.

During the financial crisis, it became clear that the incurred loss model gave too much leeway for banks to postpone recognising inevitable loan losses for too long. The IFRS 9 expected loss model is different from the FASB’s CECL model, but both models have in common that they will lead to much quicker loss recognition than was the case in 2008. 

While this was exactly what the G20 wanted us to do, some in the financial industry are now worried that IFRS 9 might exacerbate procyclicality. Since economic expectations might be overly pessimistic during a recession, they fear IFRS 9 will lead to overreaction. According to these critics, the requirement that full lifetime expected losses will have to be recognised as soon as a loan has become significantly riskier, may strengthen the downward turn of the economic cycle.”

Then Mr Hoogervorst turned to IFRS 17 and its contributions to financial stability.

In his conclusion, Mr Hoogervorst mentioned that he was not sure whether the financial system as a whole is ready for the next financial crisis. However, he added: "What I am sure of is that the recent improvements in our accounting standards will provide much more transparency that will help investors and regulators identify risks at a much earlier stage. That is the best contribution that accounting can give to financial stability."

Full speech

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