Fernando Restoy, chairman of the Financial Stability Institute (FSI) at the Bank of International Settlement, pointed out the near-future challenges for regulators in view of the post-crisis development of the banking sector.
The crisis inflated public debt in advanced economies, and increased also the level of private debt in emerging economies. Furthermore, the post-crisis situation is framed by the low levels of interest rate, which eencourages bullish and risk-bearing practices on markets, denting the profits of commercial banks. Bank-based regions, such as Europe and Japan are particularly sensitive to these issues, and perilous risk.-taking attitudes might undermine the stability of the whole sector.
Furthermore, technological developments opens up a new set of possibilities, and a newer set of risks. The global impact of fintech changes calls for coordination among international regulatory authorities, and for the development of worldwide regulatory standards. These should consist also of the adoption of complementary national policies aimed at maximising the positive effects of the new regulatory principles.
An example is the rising concern on non-performing loans. First of all, financial institutions must be able to monitor and isolate these assets. The identification and measurement of assets are generally governed by accounting standards. Since the entry into force of the new asset valuation principles of the International Financial Reporting Standards (IFRS 9), institutions located in countries that follow this accounting code will have to calculate the provisions according to their own forward-looking estimates of the expected loss from the loans.
The incorrect measurement and classification generate biases in the capital requirement, and prevent a thorough monitoring by the prudential authority. As a consequence, accounting standards often interact with prudential regulations or heterogeneous supervisory practices that regulate at the national level aspects such as the definition of non-performing loans, provisioning requirements and criteria for estimating the value of collateral and its use for classifying and valuating assets.
“A direct intrusive action by the supervisor” stated Restoy “which, for example, imposes minimum accounting provisions that would affect an entity’s balance sheet and the profit and loss statement, turns out to be incompatible with the legal framework in most jurisdictions. By contrast, the use of prudential backstops means that when the prudential supervisor believes that provisions are insufficient, it imposes adjustments to regulatory capital but not to the entity’s public financial statements. Therefore it is an option that respects the division of accounting and prudential responsibilities.”
In this context, the role of the authorities could include could facilitate corporate operations that would encourage a smooth transition to the new bipolar (accounting and prudential) structure of the industry.