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Impact of IFRSs on European bank regulatory capital

  • European Union (old) Image

10 Mar 2006

A study by the Committee of European Banking Supervisors (CEBS) has found that the guidelines that it published in December 2004 for adjustments to IFRS financial data reported by European banks for the purpose of determining banks' 'own funds' (equity capital for regulatory purposes) have satisfactorily addressed concerns of bank supervisors.

Supervisors were concerned that the introduction of IFRSs might:
  • "Jeopardise the criteria that regulatory own funds have to fulfil, namely that they be (i) permanent, (ii) readily available for absorbing losses, and (iii) reliable as to their amounts."
  • "Introduce volatility into institutions' financial statements and, more particularly, into regulatory own funds, in ways which might not reflect the economic substance of institutions' financial positions."
The CEBS compared the 31 December 2004 national-GAAP balance sheets of banks in 18 European countries with their IFRS balance sheets at 1 January 2005. CEBS found that "the overall effect of transition to IAS/IFRS and of the application of the prudential filters results in a moderate decrease in 'Total Eligible Own Funds': 2% in the aggregate sample." CEBS concludes that:

  • The analysis of the aggregate sample data confirms that the Guidelines neutralise the negative impact on credit institutions' regulatory own funds that IAS/IFRS were observed to have at transition.
  • The results of this analysis – together with the conclusions of a survey that CEBS conducted in 2005 on the implementation of the Guidelines, which indicated that participating CEBS members complied satisfactorily with the Guidelines' recommendations – should help to mitigate supervisors' concerns.
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