2014年-EBA欧洲银行管理局_20080618b_valuation_26页_351kb

Summary of the Report on Issues Regarding the Valuation of Complex and Illiquid Financial Instruments

Core Content

This report, prepared by the Committee of European Banking Supervisors (CEBS), addresses the challenges and issues surrounding the valuation of complex and illiquid financial instruments, particularly in light of the sub-prime crisis. CEBS was mandated by ECOFIN to promote reliable valuation practices that align with international financial reporting standards (IFRS). The report is based on CEBS's supervisory experience, discussions with industry representatives, and alignment with recommendations from the Financial Stability Forum (FSF), the Basel Committee, and the Senior Supervisors Group (SSG).

Main Areas of Focus

The report discusses three main areas:

1. Challenges in Valuation of Complex or Illiquid Financial Instruments
2. Transparency on Valuation Practices and Uncertainty
3. Auditing of Fair Value Estimates

Key Findings and Issues

IV.1. Challenges for the Valuation of Complex or Illiquid Financial Instruments

• Fair Value Hierarchy and Active Markets:

  • IAS 39 and IFRS 7 use a fair value hierarchy similar to FAS 157 (levels 1 to 3).
  • During the crisis, the lack of clear definitions for active markets and observable inputs led to inconsistencies in valuation practices.
  • CEBS recommends that the IASB clarify the criteria for active markets and observable inputs, and improve the consistency of fair value classification across institutions.

• Use of Modelling Techniques:

  • Institutions that relied on few pricing sources faced greater valuation difficulties during the crisis.
  • There was a lack of appropriate resources for model approval, independent price verification, and stress testing.
  • CEBS suggests that institutions should enhance their governance and allocate sufficient resources to valuation processes and back-up models.

• Risk Factors in Fair Value Determination:

  • Risk factors such as liquidity risk, model risk, and counterparty risk were not explicitly included in IAS 39's application guidance (AG82).
  • CEBS recommends that the IASB clarify the list of risk factors to be considered in fair value measurement, including counterparty, liquidity, and model risk.
  • It also suggests clarifying the approach to the unit of account in IAS 39.

• Wider Valuation-Related Issues:

  • Classification Issues:

    • IAS 39's reclassification rules are strict, prohibiting reclassification out of the trading category.
    • There are inconsistencies in how institutions apply valuation processes across different categories.
    • Differences between US GAAP and IFRS in classification and reclassification rules may affect valuations.
    • CEBS recommends that accounting standard setters analyze and eliminate such differences to maintain the quality of IFRS standards.

  • Impairment and Assets Available for Sale:

    • The report highlights the need for timely impairment recognition and potential changes to impairment rules for AFS.
    • The treatment of Day 1 profits and related reserves is also an area for improvement.
    • Institutions should ensure that the impact and management of own credit risk are properly addressed.

  • Risk Management Practices:

    • Institutions should enhance risk assessment and exposure management.
    • CEBS encourages the development of robust risk management frameworks to ensure reliable valuation during market stress.

IV.2. Transparency on Valuation Practices and Methodologies

• Institutions should improve disclosures on fair value and valuation techniques.
• Accounting standard setters should review and enhance the disclosure requirements to ensure that users of financial statements have sufficient information about valuation methods and uncertainties.

IV.3. Auditing of Fair Value Estimates

• Auditing standard setters should continue to improve guidance on the audit of fair value estimates to ensure accuracy and reliability.

Recommendations

• For Institutions:

  • Enhance valuation practices and governance.
  • Allocate sufficient resources to model approval, independent price verification, and stress testing.
  • Improve risk management by incorporating all relevant risk factors.
  • Develop back-up valuation models for complex or illiquid instruments.
  • Ensure consistent application of valuation practices across the entire banking group.

• For IASB:

  • Clarify the fair value hierarchy criteria, including active markets and observable inputs.
  • Update the application guidance to IAS 39 to include liquidity, model, and counterparty risk.
  • Clarify the unit of account approach in IAS 39.

• For EU Legislation:

  • Amend Directive 2006/48/CE to ensure that prudent valuation methods and related adjustments apply to all fair-valued instruments, regardless of whether they are in the regulatory trading book or banking book.

Conclusion

CEBS emphasizes the importance of enhancing valuation practices, improving transparency, and strengthening auditing standards to ensure reliable fair value measurement. It encourages institutions, standard setters, and regulators to closely monitor and address the issues identified in the report to improve financial reporting and risk management in the context of complex and illiquid financial instruments.