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British Banking Association 4th Annual Accounting Conference Summary

Overview

The British Banking Association hosted its 4th Annual Accounting Conference on 12 December 2008. The conference addressed the CEBS (Committee of European Banking Supervisors) work on accounting, particularly in relation to disclosures and valuation practices in the context of the financial crisis. The presentation highlighted the challenges faced by EU banks and the need for improved transparency and accountability.

Core Content

CEBS' Role in Accounting and Supervision

• CEBS is the Committee of European Banking Supervisors, which has been actively involved in addressing accounting issues during the financial crisis.
• CEBS collaborated with various European banking supervisors, including the UK FSA, German Bafin, and French Commission Bancaire, to discuss the reclassification of assets from trading portfolios into held for maturity and available for sale categories.
• These discussions occurred amid significant stress in EU banks, even before the introduction of rescue packages.

Asset Reclassification and Impact

• A survey of 30 banks showed that €250 billion of assets were reclassified from trading into other categories.
• This reclassification led to €5.8 billion of losses not being recorded in the profit and loss statements.
• CEBS acknowledged that while the reclassification was necessary due to the crisis, it should only occur in exceptional circumstances with full and meaningful disclosures.

Valuation Issues

• CEBS identified several valuation-related topics for further evaluation:

  1. Fair Value Option: Whether financial instruments under this option should be allowed to be reclassified under specific conditions.
  2. Embedded Derivatives: Whether these should be split from the host contract during reclassification.
  3. Impairment of Available for Sale Financial Assets:
     • Reversal of impairment losses for available for sale equity instruments (to align with debt instruments).
     • Whether the impairment amount for available for sale debt instruments should reflect the entire fair value reduction or just the credit risk element.

• Valuation of illiquid assets remains a priority for CEBS, and will continue to be part of the ECOFIN roadmap for next year and beyond.

Disclosures

Importance of Good Disclosures

• Good disclosures are essential for building trust in the banking sector, especially during the crisis.
• CEBS has consistently emphasized the need for transparent and comprehensive disclosures.

CEBS' Observed Good Practices

• CEBS developed a set of observed good practices for disclosures on:

  • Business model
  • Risk management
  • Exposures and their impact
  • Accounting policies and valuation issues

• These practices were presented to the market in mid-2008 and endorsed by ECOFIN.

Assessment Findings

• First Round of Assessments (End 2007 Data):

  • Limited disclosures on business models and risk management (especially liquidity risk).
  • Diverse and generic disclosures on exposures and their impact.
  • Varied presentation formats of disclosures.

• Follow-up Review (Half-Year 2008 Data):

  • Disclosures had improved in terms of detail and clarity.
  • Most disclosures were in line with good practices.
  • However, business model and risk management disclosures remained less detailed and underdeveloped.

Future Steps

• CEBS expects enhanced disclosures in the upcoming annual reports and has urged EU supervisors to ensure compliance with the observed practices.
• A second assessment is planned for early 2009, with a report to be submitted to EU political institutions by mid-2009.
• CEBS will also monitor Pillar 3 disclosures once they are made public and will provide feedback by mid-2009.

Conclusion

CEBS remains committed to improving disclosures and valuing illiquid assets appropriately. The observed good practices are seen as a practical guide for institutions to enhance transparency and align with international standards. CEBS will continue to support and monitor the implementation of these practices and will provide further policy recommendations as needed.