29 June 2012

EBF: Interaction of developments in the regulatory and accounting frameworks

In its comment letter to the chairman of the Basel Committee, the EBF deals with the importance of examining the interaction of developments in the regulatory and accounting frameworks in order to avoid any unintended consequences.

According to the EBF, two issues are of particular importance: the removal of the prudential filter for OCI (Other Comprehensive Income), and the new accounting expected loss impairment in combination with introduction of Basel III and the add-ons for G-SIFIs, which could have very significant impacts approaching a downturn.

The Basel III proposes that the institutions shall consider, in order to determine their capital base, the accumulated other comprehensive income and other disclosed reserves. The removal of the (AFS) filter (Available-for-sale category fair valued through OCI) will therefore result in unrealised gains and losses on financial asset fair valued through OCI being included in regulatory capital.

While the Basel III framework envisages that the Basel Committee will continue to review the appropriate treatment of unrealised gains, taking into account the evolution of the accounting framework, national regulators are advancing with implementation of the Basel III provisions in question.

In some jurisdictions, the national implementation may result in a full deduction of unrealised losses from regulatory capital as of 1 January 2013.

In regard to inconsistency between the implementation date of IFRS 9 and Basel III, the EBF believes that any provisions proposing removal of the prudential filter should be delayed, and in the period between the implementation of the Basel Framework and IFRS 9, unrealised gains or losses should remain under provisions equivalent to current national regulations. Such delay would also allow a closer examination of the possible impact that the removal of the filter may have, not only on regulatory capital but also on the behaviour of financial institutions. Once IFRS 9 is in place, EBF members believe that the prudential filter removal should follow the transitional arrangements as proposed in Basel III, consistently across jurisdictions, to ensure a level playing field.

In regard to treatment of accounting impairment allowance, the EBF recommends that Basel considers the interaction between the accounting changes and Basel III capital requirements, to avoid any double counting as the extension of the scope of the expected losses resulting from the new impairment accounting principles must logically lead to a decrease in the amount of unexpected losses, which is the basis of capital requirements for credit risk. The EBF suggests that it would be appropriate for Basel to consult on its view on the interactions between the accounting expected loss, the Basel EL and RWA requirements, the buffers, including the counter cyclical buffer and the add on for GSIFIs, as the accounting requirements develops.

Full letter

© EBF