Report on the 'Assessment of accounting standards from a financial stability perspective'
The European Central Bank (ECB) has today published a report entitled “Assessment of accounting standards from a financial stability perspective” that was prepared by the ESCB Banking Supervision Committee. The Committee comprises representatives of the national central banks and banking supervisory authorities of the European Union and the ECB.
Accounting standards can have a significant impact on the financial system, in particular via their potential influence on the behaviour of economic agents. Published financial statements provide financial and economic signals on which decisions are made. Furthermore, the assessment of management is largely based on accounting figures; management decisions, in turn, are influenced by accounting. Hence, accounting standards can cause financial institutions to behave in a way that may have an impact on financial stability.
Against this background, the report provides for an assessment, on the basis of some predefined criteria, of the International Financial Reporting Standards (IFRS) – as have recently been adopted in the EU – from the perspective of the stability of the financial system.
The report first presents positive features of the IFRS from a financial stability point of view. These include: (i) the overall increase in comparability and transparency, which enhances the level playing field between financial institutions and strengthens market discipline; (ii) the provision of early warning signals on exposures or risks, which is relevant both for the risk management function of financial institutions and for effective market discipline; and (iii) the use of a principles-based framework, which provides for an adequate degree of flexibility in implementation.
Second, the report identifies areas where concerns could arise from a financial stability perspective. These include:
- the reliability of “fair” values: fair values should be accurately measured and appropriately documented, so as to avoid an inappropriate upfront recognition of gains that are unrealisable and behaviour that is based on accounting figures rather than on the underlying economic factors;
- the economic basis for hedge accounting: the accounting framework should reflect the underlying economic situation and adequately take into account strictly documented risk management practices, as this would further encourage better risk management;
- provisioning: the provisioning regime should not be conducive to increasing pro-cyclicality, but should encourage the use of methods that are aimed at identifying credit losses already inherent in a particular credit portfolio at the present time.
It should be stressed that the report does not entail setting forth additional or alternative accounting standards. Instead it aims at identifying the way in which they could satisfy more extensively the objective of financial stability. In the future, the Eurosystem will continue to analyse this issue mainly with respect to the actual implementation as well as the further development of the IFRS.
The report can be downloaded from the “Publications” section of the ECB’s website (http://www.ecb.europa.eu/pub). Printed copies are also available free of charge from the ECB’s Press and Information Division at the address given below.