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Financial Stability Forum recommendations

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09 Apr 2009

The Declaration on Strengthening the Financial System (PDF 137k) issued by the leaders of the Group of 20 (G20) following their meeting in London on 2 April 2009 calls for the Financial Stability Forum (FSF) to be expanded, given a broadened mandate to promote financial stability, and re-established with a stronger institutional basis and enhanced capacity as the Financial Stability Board (FSB).

The FSF has now done that – click for Press Release (PDF 20k). The FSB membership will include all G20 countries as well as Spain and the European Commission. The FSB is chaired by Mario Draghi, Governor of the Bank of Italy. Its Secretariat is based at the Bank for International Settlements in Basel, Switzerland.

Obligations of Financial Stability Board members: As obligations of membership, member countries and territories commit to pursue the maintenance of financial stability, maintain the openness and transparency of the financial sector, implement international financial standards (including the 12 Key International Standards and Codes), and agree to undergo periodic peer reviews, using among other evidence IMF/World Bank public Financial Sector Assessment Program reports. The FSB will elaborate and report on these commitments and the evaluation process. The 12 key International Standards and Codes include International Financial Reporting Standards and International Standards on Auditing.

Concurrently, the FSF issued an updated set of recommendations and principles to strengthen financial systems. The Press Release (PDF 64k) includes an overview of the recommendations and principles plus links to download the four individual reports that comprise the recommendations and principles:

The recommendations note the following IASB actions to date:

  • Consistent guidance has been issued by the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) for fair valuation when markets are illiquid, and for the transfer of assets between valuation categories in rare circumstances. The IASB has also proposed revised standards for the consolidation and disclosure of off-balance sheet entities and related exposures. The IASB finalised in March 2009 an amendment to IFRS 7 setting forth enhancements to required risk and valuation disclosures for financial activities, including for complex financial instruments.

Regarding financial reporting and pro-cyclicality, the recommendations state:

  • The Basel Committee on Banking Supervision should assess how to address the impact of differences between International Financial Reporting standards (IFRS) and US Generally Accepted Accounting Principles (GAAP), the appropriate treatment of off-balance sheet exposures and guarantees, and the treatment of highly liquid government securities.
  • The FASB and IASB should issue a statement that reiterates for relevant regulators, financial institutions and their auditors that existing standards require the use of judgement to determine an incurred loss for provisioning of loan losses.
  • The FASB and IASB should reconsider the incurred loss model by analysing alternative approaches for recognising and measuring loan losses that incorporate a broader range of available credit information. The FSF recommends that the FASB and IASB establish a resource group to provide input on technical issues and complete this project on an expedited basis.
  • Accounting standard setters and prudential supervisors should examine the use of valuation reserves or adjustments for fair valued financial instruments when data or modelling needed to support their valuation is weak.
  • Accounting standard setters and prudential supervisors should examine possible changes to relevant standards to dampen adverse dynamics potentially associated with fair value accounting. Possible ways to reduce this potential impact include the following:
    • Enhancing the accounting model so that the use of fair value accounting is carefully examined for financial instruments of credit intermediaries.
    • Transfers between financial asset categories.
    • Simplifying hedge accounting requirements.
A wide range of 'credit crunch' information is Here on IAS Plus.

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