Tuesday, 17 June 2008

The ECB on Eurozone Bank Loss Recognition

More from the ECB financial stability review. We take up the story with a discussion of the losses in large complex financial institutions:
The impact of the sub-prime crisis can be seen in the figures disclosed by banks in their financial statements in two main ways: valuation changes on various assets and increases in credit impairments. Most of the figures recorded in banks’ accounts are valuation changes and relate to securities whose value has been adversely affected by the sub-prime turbulence. Under International Financial Reporting Standards, euro area banks value these securities depending on the accounting category in which they were included at the time of recognition [principally] fair-value [and] available for sale.
(The emphasis is mine.)

In other words the impact so far on Eurozone banks has mostly been confined to fair value instruments. For accrual accounted loans we have not yet seen massive increases in loan loss provisions. Clearly there are some European countries with their own property market issues - the UK, Spain, Ireland, the Baltics, perhaps Poland - so we definitely have not seen the end of this story yet.

The ECB then points out the inherent superiority of FAS 157 vs. IAS 39:
the way in which banks calculate mark-to-market valuation changes and whether these valuation changes are comparable across banks have attracted increased attention in the current period. Before the turmoil, under IFRS, banks disclosed limited information concerning the amount and type of assets that were marked to model. This situation in the euro area is in contrast to the United States where new Generally Accepted Accounting Principles (GAAP) require certain disclosures concerning the portion of assets in a portfolio that are purely marked to model.
In other words the Europeans can hide both their methodology and the split between mark to market and mark to model whereas the Americans can't.

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