IFRS in the Banking Sector A supervisor’s perspective. REPARIS Workshop Marc Pickeur Vienna CBFA 14 - 15 March 2006 Belgium. Objective.
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REPARIS Workshop Marc Pickeur
14 - 15 March 2006 Belgium
July 2005: Supervisory guidance on the use of the fair value option by banks (ED)
Fair value option: Basis for conclusions
Fair value option: Main actions
Supervisory expectations relevant to the use of the fair value option
1. Supervisors expect a bank’s application of the fair value option to meet the criteria set forth in IAS 39 in form and in substance.
2. Supervisors expect banks to have in place appropriate risk management systems (including related risk management policies, procedures and controls) prior to initial application of the fair value option for a particular activity or purpose and on an ongoing basis.
3. Supervisors expect banks to apply the fair value option only to instruments for which fair values can be reliably estimated.
4. Supervisors may require banks to provide supplemental information to assist them in assessing the impact of banks’ utilisation of the fair value option.
Supervisory assessment of risk management, controls and capital adequacy
5. Supervisors should assess whether a bank’s internal financial analysis of counterparties evaluates the impact of the counterparties’ use of the fair value option.6. Supervisors should evaluate a bank’s risk management and control practices as they pertain to the use of the fair value option.7. Supervisors should consider risk management and control practices related to the use of the fair value option when assessing capital adequacy.8. Regulatory capital should be adjusted for gains and losses from changes in own credit risk as a result of applying the fair value option to financial liabilities.
November 2005: Sound credit risk assessment and valuation for loans (ED)
Supervisory expectations concerning sound credit risk assessment and valuation for loans
1. The bank’s board of directors and senior management are responsible for ensuring that the banks have appropriate credit risk assessment processes and effective internal controls to consistently determine provisions for loan losses in accordance with the bank’s stated policies and procedures, the applicable accounting framework and supervisory guidance commensurate with the size, nature and complexity of the bank’s lending operations.2. Banks should have a system in place to reliably classify loans on the basis of credit risk.3. A bank’s policies should appropriately address validation of any internal credit risk assessment models.
4. A bank should adopt and document a sound loan loss methodology, which addresses credit risk assessment policies, procedures and controls for assessing credit risk, identifying problem loans and determining loan provisions in a timely manner5. A bank’s aggregate amount of individual and collectively assessed loan provisions should be adequate to absorb estimated credit losses in the loan portfolio.6. A bank’s use of experienced credit judgement and reasonable estimates are an essential part of the recognition and measurement of loan losses.7. A bank’s credit risk assessment process for loans should provide the bank with the necessary tools, procedures and observable data to use for credit risk assessment purposes, account for impairment of loans and the determination of regulatory capital requirements.
Supervisory evaluation of credit risk assessment for loans, controls and capital adequacy8. Banking supervisors should periodically evaluate the effectiveness of a bank’s credit risk policies and practices for assessing loan quality.9. Banking supervisors should be satisfied that the methods employed by a bank to calculate loan loss provisions produce a reasonable and prudent measurement of estimated credit losses in the loan portfolio that are recognized in a timely manner.10. Banking supervisors should consider credit risk assessment and valuation policies and practices when assessing a bank’s capital adequacy.
Developed two reporting frameworks:
CEBS GUIDELINES ON FINANCIAL REPORTING (FINREP – Published 16.12.05)
CEBS GUIDELINES ON COMMON SOLVENCY REPORTING (COREP – Published 13.01.06)
To be used by credit institutions and investment firms when they report their solvency ratio to supervisory authorities under the Capital Requirements Directive.