European Union finance ministers supported urgent reforms to reduce the impact of economic cycles on the banking sector.
The council welcomes the four policy responses to reduce pro-cyclical effects of financial regulation, namely:
- the monitoring of system-wide risks;
- the building of counter-cyclical buffers through capital and provisions;
- the improvement of accounting rules,
- the establishment of a sound framework for remuneration schemes.
The Council agreed that fundamental changes were needed to banking and accounting rules to push banks to build up extra capital in good times, which could be drawn on in an economic downturn. Accounting standards, such as IFRS, currently do not allow for the recognition of expected losses. The
IASB will publish an exposure draft dealing with the provisioning issue, including consideration of an expected loss model, by October 2009.
The Council also considers that mark-to-market valuation of many categories of financial instruments should be reviewed and adjusted as appropriate, particularly taking into account the uncertainty of valuations, the reality of the business model of banks, the holding horizons and the actual liquidity of markets
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