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IAS/IFRS Impact on Banks' Regulatory Capital and Balance Sheet Items

Executive Summary

The introduction of IAS/IFRS has raised concerns among supervisory authorities regarding its potential impact on the criteria for regulatory own funds, which must be permanent, readily available for absorbing losses, and reliable in amount. There were also worries about the possible introduction of volatility into financial statements, which might not accurately reflect the economic reality of banks' financial positions.

To address these concerns, the Committee of European Banking Supervisors (CEBS) developed Guidelines on prudential filters for regulatory capital. These guidelines aim to adjust regulatory own funds for changes in accounting equity caused by the application of IAS/IFRS or similar national GAAP. The work was informed by the Basel Committee on Banking Supervision and the guidelines were issued in December 2004.

CEBS conducted an analysis of financial data from a sample of institutions to assess the validity of supervisory concerns and the effectiveness of the guidelines. The findings suggest that the Guidelines neutralise the negative impact of IAS/IFRS on regulatory own funds during the transition period. The survey results from 2005 also indicate that participating CEBS members complied well with the guidelines, which helps to alleviate concerns. CEBS remains committed to monitoring the ongoing impact of IFRS on the banking sector.

Key Results

• The aggregate data cover 18 countries, with 5 already applying IAS/IFRS or similar national GAAP.
• The impact of IAS/IFRS on regulatory capital is relatively insignificant in these 5 countries, mainly due to the first application of IAS 39.
• The balance sheet total increased by 9%, while the accounting equity decreased by 5%.
• The reduction in regulatory own funds is primarily due to the reduction of reserves from the first-time application of IAS/IFRS.
• The application of prudential filters helps to neutralise the decrease in minority interest and partially include fair value revaluation reserves in additional own funds.
• The overall effect of the transition and prudential filters is a moderate decrease in Total Eligible Own Funds of 2% in the aggregate sample.

Coverage and Methodology

• The aggregate data represent the average of nearly 50% of the banking sector in data-providing countries.
• CEBS collected data before and after the application of the Guidelines to compare the impact of IAS/IFRS on balance sheets and regulatory own funds.
• The data was aggregated from representative samples of the banking sectors of CEBS members.
• Prudential filters were applied in accordance with national-level decisions or intentions.

Main Findings

a) Balance Sheet

• Total balance sheet increased by 9% (from 7,473.7 to 8,153.5 billion EUR).
• Total assets also increased by 9%.
• Financial assets held for trading rose by 74%.
• Financial assets designated at FV through P/L increased by 394%.
• Available-for-sale financial assets increased by 17%.
• Loans and receivables decreased by 3%.
• Held-to-maturity investments dropped by 64%.
• Total liabilities increased by 10%.
• Financial liabilities held for trading rose by 111%.
• Derivatives used for hedging increased by 2,531%.
• Total equity and minority interest decreased by 5%.
• Minority interest dropped by 42%.
• Reserves decreased by 13%.
• Revaluation reserves increased by 555%.

b) Own Funds

• Total eligible regulatory own funds decreased by 2% (from 383.6 to 375.3 billion EUR).
• Original own funds before prudential filters decreased by 12%.
• Original own funds after prudential filters decreased by 4%.
• Additional own funds before prudential filters increased by 2%.
• Additional own funds after prudential filters increased by 4%.

Conclusion

The transition to IAS/IFRS has had a moderate impact on banks' balance sheets and regulatory capital. While there was an expected increase in balance sheet total, the decrease in accounting equity was less anticipated. The prudential filters implemented by CEBS have helped to mitigate the negative effects on regulatory own funds, particularly in terms of minority interest and revaluation reserves. However, CEBS acknowledges that the topic is still evolving, and both institutions and supervisors are in a learning phase. Continuous monitoring is essential to ensure the stability and reliability of regulatory capital under IAS/IFRS.