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CEBS study on adjustments to IFRSs for regulatory reports

  • European Union (old) Image

08 Oct 2007

The Committee of European Banking Supervisors (CEBS) has published an analysis of adjustments European banks in 28 countries have made to reported IFRS measurements for the purpose of computing bank regulatory capital.

CEBS calls these adjustments 'prudential filters'. CEBS adopted the 'prudential filters' 2004. CEBS will present and discuss the report and its conclusions at a public hearing scheduled for 16 October 2007. An excerpt:

"The analysis shows that the implementation of the prudential filters has improved over time and that a very high level of compliance with the CEBS guidelines has been achieved amongst members.... As concerns the quantitative part of the analysis, the data collected shows that prudential filters moderately reduce total eligible own funds by 0.9% and result in a 5.2% decrease in original own funds, mainly owing to the AFS equity instrument filter recommended by CEBS."

The CEBS 'prudential filter' adjustments include:

  • The boundary between debt and equity. Shares in co-operative entities and certain preferred shares that are liabilities under IFRSs are converted to equity for regulatory capital purposes.
  • The boundary between debt and equity. An embedded derivative that constitutes an equity component of a compound financial instrument under IFRSs is classified as part of the liability for regulatory capital purposes.
  • Available-for-sale (AFS) instruments.Under IFRSs, all AFS instruments are measured at fair value, with value changes recognised in equity subject to loss recognition for impairments.
    • AFS equities. Under IFRSs, all AFS instruments are measured at fair value, with value changes recognised in equity subject to loss recognition for impairments. Under the CEBS guidelines, unrealised losses on AFS equities are deducted, after tax, from original own funds and unrealised gains are only partially be included in additional own funds before tax.
    • AFS loans and receivables. Under CEBS guidelines, unrealised gains and losses, apart from those related to impairment, are 'neutralised' (reversed) in own funds after tax.
    • Other AFS assets, (for example debt securities and financial instruments subject to interest rate risk). Under CEBS guidelines, a bank may choose to classify these either (a) as equities or (b) as loans and receivables.
  • Cash flow hedges. There should be a consistent treatment of gains and losses resulting from a transaction whereby a cash flow hedge is created for an available for sale instrument: if the gains on the hedged item are recognised in additional own funds, so should the results of the corresponding cash flow hedging derivative.
  • Loan losses. As a general principle, no regulatory adjustments should be made to impairment losses. Impairment related to credit risks should always be taken into account via the profit and loss account and therefore deducted from original own funds.

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