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FSB provides monitoring update on long-term investment finance

  • FSB (Financial Stability Board) (lt green) Image
  • G20 (lt green) Image

17 Sep 2014

The Financial Stability Board (FSB) has published a report to the G20 Finance Ministers and Central Bank Governors on financial regulatory factors affecting the supply of long-term investment finance. The report provides an update on the FSB's ongoing monitoring efforts around this issue and summarises a survey of FSB members, continued engagement with practitioners in long-term finance from the private sector, consultation with FSB Regional Consultative Groups (RCGs), and work by the FSB Secretariat together with the staff of the IMF, World Bank and OECD.

In recent discussions, one of the factors often mentioned in connection with long-term finance has been accounting and especially fair value accounting. A Green Paper consultation on the long-term financing of the European economy published by the European Commission (EC) in March 2013 had suggested that the fair value might lead to short-termism in investor behaviour. This had solicited, among others reactions, a statement by the IASB that "the IASB does not believe that fair value accounting principles have of themselves led to short-termism in investment behaviour". In an earlier speech the IASB Chairman had noted that even long-term investors require shorter-term, reliable and unbiased performance measures to keep track of their investments and to hold management to account. Nevertheless, the EC later adopted a package of measures on long-term financing that included considering whether the use of fair value in especially in IFRS 9 Financial instruments "is appropriate, in particular regarding long term investing business models".

The FSB report reflects some of the concerns regarding fair value accounting that were voiced in the member survey (the EC is a member of the FSB). The two main concerns voiced were that:

  • the use of fair value accounting for financial instruments increases volatility in measures of income and capital and so could provoke adverse reactions from investors and
  • fair value does not reflect the business model of long-term investors, as it can mean that short term changes in value of instruments are given undue weight.

The second concern was especially raised for insurers, whose business model involves matching assets and liabilities, and for holders of strategic equity investments. Nevertheless, the members also noted that the insurance contract project is still under development, and that the introduction of expected loss accounting for loan provisions through the impairment project will greatly enhance transparency.

All in all, the FSB finds that it is too early to fully assess whether the concerns are justified and what the impact of the changes on the provision of long-term finance or changes in market behaviour in response to these changes might be, but promises that the regulatory community "will remain vigilant to avoid material unintended consequences and to analyse potential impacts as implementation proceeds". For the time being, however, the FSB concludes:

The FSB's monitoring continues to find little tangible evidence or data to suggest that global financial regulatory reforms have had adverse consequences on the provision of long-term finance. The reforms are intended to be proportionate to risks and to support financial stability. They are not designed to encourage or discourage particular types of finance.

Please click for access to the full report on the FSB's website.

After the report was released, the FSB held a plenary meeting in Cairns, Australia, that looked at vulnerabilities affecting the global financial system and reviewed work plans for completing core financial reforms. Among other topics, the plenary discussed work by the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) on new standards for the financial sector that take account of the lessons of the financial crisis and introduce forward-looking expected loss provisions for loan losses. Members welcomed this work and reaffirmed the continuing relevance of the objective of achieving a single set of high-quality global accounting standards. The FSB also encouraged the IASB and FASB to monitor the consistent implementation of their respective standards and to continue to seek opportunities for further convergence.

Please click for the press release on the FSB's website.

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