Acuerdos comerciales

Accounting standards affect the earnings, risk and capital adequacy ratios of financial institutions and thus interact with capital requirements. The International Financial Reporting Standards (IFRS) are mandatory for financial institutions within the European Union. The supervisory definition of eligible regulatory capital refers to balance sheet items that are subject to accounting standards. Capital standards rely on a definition of loss that should not contradict the value credit exposures are recognized in the financial statement. Accounting standards relevant to the evaluation of credit exposures include IAS 39 which regulates the ”Recognition and Measurement of Financial Instruments”, whereas IFRS 7 stipulates disclosures about risk and performance of financial instruments.

IAS 39 permits the use of a fair value option in the valuation of financial instruments, if a fair value can reliably be obtained directly from observable market prices or from a robust valuation technique. Fair value accounting requires that a risk management

system is in place which incorporates appropriate valuation methods to calculate reliable fair values.14 _{The fair value option of IAS 39 requires a firm to decide irrevocably at the}

initiation of an exposure, whether a financial asset or liability will be measured at fair value to determine profit and loss. Criteria for determining the eligibility of exposures for fair value accounting are stated in paragraph IAS 39.9-39.11A.15 The objective of fair value accounting is to avoid significant mismatches between the value of an exposure under accounting standards and economic criteria.16 _{The exclusion of loans and receivables from}

fair value accounting supports the transparency and reliability of financial statements, as it is difficult to determine and validate reliable fair values of financial instruments without an observable market price from an active market. Furthermore, applying fair value accounting to liabilities without an observable market price would permit institutions to report profits from a deterioration of their own creditworthiness. Banks would be enabled to strategically manage earnings report and to misreport financial statements.

Banking book assets are mostly qualified as held-to-maturity and accounted for at accrued costs, whereas, trading book assets are generally assumed to be available-for sale and accounted for at fair value.

Supervisory agencies decline the use of fair value accounting for illiquid financial instru- ments to prevent unrealized gains of credit exposures from being recognized as regulatory capital.17 _{Deficiencies in banks’ risk management must not result in recognizing unrealized}

gains in the regulatory capital or deriving understated unrealized losses from unreliable fair values. The exclusion of loans and receivables from fair value accounting implements the supervisory view. Corporate loans of banking book exposures are accounted for at accrued costs so that unrealized gains in fair value are omitted from being recognized as capital, whereas unrealized losses are covered, establishing adequate loss provisions.

The Basel Committee recommends recognizing gains and losses which result from fair value accounting as tier-I capital, with the exception of gains and losses arising from changes in a bank’s credit risk of liabilities. However, unrealized gains or losses resulting from exposures subject to fair value accounting must not alter regulatory capital in a way that would distort the economic condition of a bank. Supervisors agencies control for the level of cumulative unrealized gains attributable to the fair value option in relation to

14_{Supervisory agencies encourage the use of systems that integrate accounting, risk assessment and capital}

adequacy functions for credit exposures.

15_{Effects of accounting standards on capital requirements will not be addressed for host contracts with}

embedded derivatives, hedge accounting or derivative contracts of production assets.

16_{Cf. BCBS (2005e), p. 7.}

17_{In contrast, supervisory agencies consider the use of mark-to-model valuations to be an indispensable}

requirement for an adequate valuation and economic performance measurement of credit portfolios in risk management applications.

equity and regulatory capital.

The expected loss of credit exposures differ from credit loss provisions reported in finan- cial statements for methodological reasons. Accounting standards allow the identified but not yet incurred credit loss of exposures recognized at amortized costs to be considered in loss provisions. IFRS fair value accounting does not allow for loss provisions. Differences between the level of loss provisions and expected losses under the Basel II framework par- tially result from the exclusion of recently originated loans and the fact that expected loss only covers default risk for a one-year time horizon. Under the revised capital standards, the eligible regulatory capital is adapted for any difference between credit loss provisions and expected credit loss of exposures.

For credit exposures carried at amortized cost, a methodology must be in place to specify loan loss provisions, if (1) bankruptcy or financial reorganization of the borrower is proba- ble, (2) the borrower suffers from significant financial difficulties, (3) a breach of contract occurs, such as default or delinquency on interest or principal payments, or (4) the lender has granted concessions to the obligors to circumvent financial difficulties. The method- ology for determining loan provisions is accepted by supervisory agencies, if the bank (1) maintains effective systems and controls for identifying, monitoring and addressing asset quality problems in a timely manner, (2) has analyzed all factors that significantly affect the collection of obligations, (3) has established an appropriate loan provisioning process.

After an identification of exposures, banks assess loans for impairment. Financial in- struments carried at amortized costs are impaired individually by discounting expected outstanding cash flows using the original effective interest rate of the instrument. If an impairment on the basis of an individual loan assessment is denied, a loan is included in a group of loans with similar credit risk characteristics and the group is assessed for a collective impairment. Segmentation of loans for collective impairment is typically based on the type of loan, credit risk class, geographical location, collateral type and past-due status.

Under the IFRS framework, impairments are incurred as a result of effective events that impact the estimated future cash flows of the asset, whereas likely losses expected as a result of future events are not recognized. The definition of impairment events is based on objective and subjective criteria. Objective criteria refer to actions that are beyond the control of the bank, such as payments that are overdue by a minimum amount or by a minimum number of days. Subjective criteria depend on the bank’s assessment of exposures and bank-initiated actions such as the granting of a payment delay. Events that trigger an impairment of exposures include (1) significant financial difficulties of the obligor, (2) a breach of contract such as default or failure to make in interest or principal payment, (3) concessions granted by the lender in response to the borrower’s financial situation, (4) a probable default, (5) a change of the obligor’s PD, which may coincide

with a change of external rating, (6) a change in the LGD estimate, (7) a change in credit spread given a constant expected loss, (8) a change in the usage of a particular credit facility, (9) the disappearance of an active market, or (10) an expected decrease in estimated future cash flows of a group of exposures, for example due to unfavorable national or sectoral economic conditions.

It is assumed that a secondary markets exists for any credit corporate exposure consid- ered in the prediction of credit portfolio risk, so that fair values reliably represent the economic risk to be covered by regulatory capital. The quantification of credit portfolio risk described in Section 5 relies on the assumption that the credit risk valuation model of Section 3 will receive the approval of supervisory agencies as an appropriate valuation method to provide fair values of credit exposures.