The European Systemic Risk Board does not yet understand the impact the International Accounting Standards Board’s (IASB) new financial instruments accounting rules will have on financial stability, its chairman Mario Draghi has confirmed.
In a 29 February letter addressed to the European Parliament’s Committee on Economic and Monetary Affairs (ECON), the European Central Bank (ECB) chairman wrote: “While I appreciate the ECON committee wishes to receive a reaction from the [ESRB] at an early stage, I would like to signal that, although several member institutions of the ESRB have already taken a public stance on the issues you raise, the ESRB has not yet assessed the impact of the new accounting standards on the financial sector as a whole.”
Draghi explained that this was down to the “poor quality of the data available and uncertainty as to whether – and if so how – capital regulation might change in the light of the new accounting rules”.
The letter continues: “It should be noted that the time endorsement of IFRS 9 is a necessary condition for entities to make significant progress on its implementation. This may in turn result in the more reliable data needed for this project.
“Indeed, there are significant interplays between accounting and regulation, and the ESRB is interested in how these might impact on financial stability – for example, in terms of pro-cyclicality of impairment and measurement requirements and the broader effects of fair value accounting.”
Draghi concluded: “Given the need to fully understand the macroprudential implications, consider factual developments, including progress made on implementation, and involve the ESRB membership in a necessarily ample discussion, the ESRB may therefore respond to the ECON committee in the course of 2017.”
The IASB has been working on International Financial Reporting Standard 9 (IFRS 9) since 2009 in a bid to replace its existing financial-instruments accounting standard.
If the EU endorses the standard, it would apply to accounting periods beginning on or after 1 January 2018.
The new standard would be used extensively by systemically vital banks and insurance companies as the basis for their financial-asset accounting.
There is a concern among IFRS-sceptic MEPs that the European Commission has succumbed to lobbying by banks and the wider accounting establishment.
In a speech to the 2011 IFRS annual conference in Zurich in July, IASB chairman Hans Hoogervorst said: “The endorsement of IFRS by Europe has been extremely important for IFRS. We still have a small problem now with IFRS 9.
“There are many people who now think they should adopt it quickly because it gives a little bit more leeway in terms of the Greek government bonds.”
Meanwhile, the European Union’s adviser on accounting matters, the European Financial Reporting Advisory Group, has already recommended the EU adopt IFRS 9.
That endorsement has met stiff resistance from some quarters.
In December, both the LAPFF and the EFRAG wrote to the EU’s internal market commissioner, Jonathan Hill, to clarify their position on IFRS 9.
Both insisted they were in the right.
On 8 January, the ECON committee wrote to Draghi and set out the Parliament’s concerns about IFRS 9.
The committee wrote: “Given the importance of this new financial reporting standard, [ECON] is concerned about this lack of reliable quantitative data and assessment.
“The impact of the introduction of IFRS 9 on financial stability in general, and on the amount of loan loss provisioning and banks’ regulatory capital in particular, is of concern to the committee.”
The committee also invited the ESRB to comment on the impact of fair value measurement – plus any wider use of fair value under IFRS 9 – in relation to its macro-economic impact.
In a bid to break the impasse, the European Commission invited academics from the Mannheim Business School to assess whether IFRS 9 satisfied the EU endorsement framework.
Professors Jannis Bischof and Holger Daske responded: “We observe that prudential supervisors from Europe did not express significant concerns about the impact of IFRS 9 on financial stability and, when assessing the standard in its entirety, we do not foresee such an adverse impact.”
They concluded: “Ultimately, it is a purely political decision how to weight these different costs and benefits of different parties. Overall, we still conclude IFRS 9 is likely to be conducive to the European public good, not at least because it is a better standard than its widely criticised predecessor IAS 39.”