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Accounting roundup: More work needed on ‘too big to fail’ banks

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A group of European Central Bank economists have called for further analysis to confirm whether the framework for managing global systemically important banks incentivises institutions to massage their risk profile downward.

The four economists – Markus Behn, Giacomo Mangiante, Laura Parisi and Michael Wedow – claimed such manipulation could “distort the relative ranking of banks’ systemic importance and have adverse effects on the functioning of capital markets and the provision of financial services”.

In particular, they noted studies showing that banks had arbitraged regulatory and reporting differences between different EU member states to reduce their risk scores.

Other studies relied on by the researchers pointed to the potential for banks to reduce their repo activities at year-end.

In order to identify the scope for abuse, the researchers examined quarterly data instead of relying purely on annual risk scores.

The economists also called for prudential regulators to conduct further research into “whether an alternative metric for the risk score calculation”, such as a smoothing or averaging of quarterly scores, could unpick the unintended consequences of the framework for assessing systemically important banks.

The researchers claimed that although there was “empirical evidence” to suggest that the framework had incentivised banks to lower their exposure to risk, it might equally “have incentivised some banks to window dress” their risk scores.

IASB eyes new pension standard

Meanwhile, the International Accounting Standards Board (IASB) has updated its workplan to confirm a decision to launch a standard-setting project on pension benefits that depend on asset returns.

According to the latest information, the board plans to have completed a review of the available research by the middle of next year.

In July, the IASB voted to delay work on its controversial IFRIC 14 project in order to align that work with its parallel standard-setting project on pensions.

IASB staff have signalled that work on pension plans that depend on an asset return could potentially widen the scope of its IFRIC 14 amendment.

EU plots financial reporting ‘lab’

Finally, more details have emerged of the European Union’s plans to structure its proposed “financial reporting lab”.

According to a call for applicants to join the body released on 13 September, the new group will draw its membership from investors, academics and civil society.

This contrasts with the FRC’s Financial Reporting Lab in the UK, which draws its membership mainly from investors and business.

The EU body will have no responsibility for financial reporting at this stage, focusing instead on non-financial matters and sustainability reporting.

Jean-Paul Gauzès, president of the European Financial Reporting Advisory Group (EFRAG), will chair the lab, but EFRAG’s board will not itself play a role in decision making.

The new lab’s vice-chair is Alain Deckers, who heads the European Commission unit responsible for corporate reporting.

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