Evento: CESR’s Conference. Organizado por:  CES

Roldán Alegre, José María

English

Repositorio Institucional de la Biblioteca del Banco de España

Preparing for the future: Where to now for regulation andsupervision in the field of securities?SESSION C: AccountingJosé María RoldánDirector General for Banking Regulation, Banco de EspañaCESR’s Conference on 23 February. Paris To be clear from the beginning, in my view fair value is thebest accounting standard for providing final users of financialstatements with relevant, reliable and comparable information– And all in all for promoting a better allocation of resourcesthat internalises the information present in financial marketsOutlineDG - REGULATION2 But as the current crisis in the international financial system hashighlighted fair value has its own limitations. For this reason it isnecessary to improve fair value.Limitations of fair valueSubjectivity(in the design of valuationmodels)Volatility(market conditions aretaken in a specifictime)Excessive emphasisThe crisis in theinternational financialsystem has highlightedthese and other relatedshortcomings of fairvalue(Specially for complexQuantitative limitationsModels have not properlycaptured the characteristics ofcomplex products and weredesign under benigneconomic conditionsQualitative limitations:Systems have not been welldesigned to verify and testthe valuations madeDG - REGULATION3on the short term(perverse incentives forbank managers)products developed in recentyears under the originate-to-distribute banking model)Lack of transparency:The information reportedto the market does notappear to have beensufficientIntensification of the procyclical behaviour of financial markets, becausefair value have introduced incentives to increase leverage andmispricing risksImproving fair value: valuation reserves Institutions could set aside valuation reserves for those more complexstructured products that are market-to-model Valuation reserves would recognise the uncertainty associated with thecalculations of fair value under specific circumstancesComplex instrument Valuation model Fair value reflected in thefinancial statementsDG - REGULATION4 They should be objective, transparent, symmetrical and act at all timesInputs to beestimatede.g. Probability of default (PD)PD1= PD estimated in scenario 1PD2= PD estimated in scenario 2…The valuation reserve shouldreflects the uncertaintiessurrounding the estimation of theinputs (e.g. PD)Improving fair value: dynamic provisions Dynamic provisions should be considered as an approximation tothe fair value of banks’ loan portfolios– They mitigate the fact that, at good times of the economiccycle, risks are build up but are only disclose with a delay inthe P&L account of the financial institutions,• It is not reasonable that investors should be surprised in the futureby what is already known it is going to happen– They take into account the transition from collectiveassessment of impairment to individually identified lossesDG - REGULATION5– … in other words, dynamic provisions offer a truer and fairerview of financial institutions– Moreover, and importantly, they contribute to reduce theprocyclicality of accounting rules, and more general, theprocyclical behaviour of financial market participants• Reduce “excessive prociclicality” Dynamic provisions, as valuation reserves, should be objective andtransparentImproving fair value: general principles Search for better valuations– Quantitative aspects of valuations models– More realistic view of the risks and benefits of the activitythroughout the cycle Minimise the procyclical impact induced by fair value– Valuation reserves and dynamic provisions are two examplesDG - REGULATION6 Governance– Qualitative aspects when implementing fair value are relevant(models should be tested by independent units etc.) Transparency– Investors need to have proper information (volume of exposuresvalued at fair value, valuation method and inputs etc.)Implementation of IFRS The rationale behind IFRS is that the information contained in the financialstatements must be useful for market participants in order to make theireconomic and investment decisions I agree with this general principle But at the same time I consider that it is not only desirable but also necessaryto minimise the coexistence of different accounting criteria depending onthe final use of the financial information– Tax legislation; solvency regulations; commercial law etc.DG - REGULATION7 IFRS should act as an umbrella that gives a response to the various needsthat the users of financial information may have– Through the pertinent corrections, such as prudential filters If it was not the case, there would be two major risks– Inefficiency– Survival of the own IFRS framework On the top of that, efficiency can be improved by offering integratedtechnological solutions: XBRL is a good exampleConclusion Fair value is the best accounting standard for providing final users offinancial statements with relevant, reliable and comparable information But it is necessary to improve it, and objective and transparentvaluation reserves and dynamic provisions can contribute to thisprocess– To strengthen the relevance, reliability and comparability ofinformationDG - REGULATION8– To make it compatible with best practices in risk management– To minimise the “excessive procyclicality” induced by accountingstandards Implementation of IFRS is also important– Reduce the inefficiencies associated with the coexistence ofmultiple accounting rules depending on the final use of thefinancial informationThank you for your attentionDG - REGULATION9

Preparing for the future: Where to now for regulation and supervision in the field of securities?

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Preparing for the future: Where to now for regulation and supervision in the field of securities?

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