03 June 2014

ECB/Constâncio: Accounting and financial reporting by central banks

Developments in international accounting standards

The ECB supports the establishment of a single set of global accounting and financial reporting standards. This is vital for the sake of consistency, comparability and thus transparency. It is also important not only for investors and other stakeholders, but also with a view to banking supervision and regulation. As you all know, accounting information serves as a basis for various prudential measures, such as minimum capital requirements and the leverage ratio. In the EU, the new capital framework for banks that came into effect on 1 January 2014 (what is known as the "CRR/CRD IV"), and the supervisory approach within the Single Supervisory Mechanism (SSM), is aimed at harmonising prudential requirements and practices for all EU banks. This is commonly referred to as the "single EU rulebook" or the "single supervisory model". The coexistence of different accounting frameworks would obviously be inconsistent with this objective.

Nevertheless, the ECB understands that the International Accounting Standards Board (IASB) may have to go towards the finalisation of International Financial Reporting Standard (IFRS) 9, even if a broader agreement cannot be achieved.

Interaction between financial reporting and financial regulation

Many measures analysed in the comprehensive assessment exercise are based on accounting data. The vast majority of the banks undergoing the assessment report their accounts in line with IFRS. But some euro area banks still apply local Generally Accepted Accounting Principles (GAAP). This creates challenges regarding the comparability of data at the European level. It is therefore now appropriate to discuss the links between financial reporting and financial regulation.

In the context of applying a more harmonised approach to supervision, the European Banking Authority (EBA) has developed technical standards for the regular reporting of bank-level supervisory data, using the CRR/CRD IV as a basis.

Accounting values are the basis for determining regulatory capital. Nonetheless, accounting capital and regulatory capital reported under the new regulatory reporting standards will generally differ. This is due to the different objectives of accounting and supervisory data. Consequently, prudential filters, as well as other instruments, are applied in order to adjust accounting figures to prudential figures.

Central bank balance sheets in stormy times

The financial crisis required unconventional monetary policy tools and liquidity support that had a considerable impact on the size of many central banks’ balance sheets, influenced their risk profile and left marks on their financial buffers and profit and loss accounts. The Eurosystem reacted to the financial crisis by increasing its intermediation in bank funding markets via an increased range of monetary policy instruments. Consequently the Eurosystem risk profile partially shifted and increased, from FX rate and gold price risk to credit risk related to domestic assets. Any related counterparty default risk is however mitigated by adequate underlying collateral which provides an additional guarantee. The operational framework was adapted accordingly – examples thereof are the extension of credit maturities, outright purchase programmes for securities and changes to the collateral framework.

In the aftermath of the financial crisis, the Eurosystem’s risk control frameworks were developed further and refined. The Eurosystem ensures that it is protected in financial terms, inter alia, through the implementation of prudent risk management and accounting frameworks, and through a cautious allocation of its invested assets. As a result of these risk control measures, the risk profile of the Eurosystem’s balance sheet has been contained, despite the use of the various non-standard measures since mid-2007.

Central bank financial reporting and governance issues

There is an increasing worldwide demand for transparency to be strengthened, also triggered by the financial crisis. This, in turn, impacts on financial reporting and how it is tackled, as well as on the way in which governance issues are presented. One aspect that the ECB has paid particular attention to in recent years is the development of its management report. The management report is aimed at providing the ECB’s stakeholders with comprehensive information on primarily issues with a financial impact such as portfolio management, the production of its financial accounts, various risk management aspects, financial resources and financial results, as well as related governance issues.

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