МІНІСТЕРСТВО освітии науки України
НТУ В«ХАРКІВСЬКИЙПОЛІТЕХНІЧНІЙ ІНСТИТУТ В»
Кафедра В«английскогомови и ділової комунікації В»
Тема: В« ACCOUNTINGRULES FOR REGULATIONS IN BANKING
SECTOR В»
Харків - 2008
As many banks and other creditinstitutions start offering their services globally, they should change the waytheir business is conducted. This is the main reason way differentinternational rules become more and more popular. Among the others, Basel Committeeon Banking Supervision and the International Accounting Standards Board (IASB)issue many important rules that are implementing into banking sector. Thispaper is going to present the most important Basel Committee's and the IASB'sstandards which affect banking activity.
As for the European Union's legislationfor banking sector, it's necessary to point out the following.
As more and more countries want to jointhe European Union, they usually try to apply European law their own lawsystem. That situation refers to banking system, too. There are severalEuropean Union Directives which regulate banking activity. One of the mostimportant is the First Council Directive on the coordination of the law,regulations and administrative provisions relating to the taking up and pursuitof the business of credit institutions [1] and the Second CouncilDirective [2]. They consist of framework for banking institutions havingtheir headquarters either inside or outside the European Union.
Other European directives regulatedeposit-guarantee schemes [3], amount of banks 'own fund [4],supervision of credit institutions on a consolidated basis [5], large exposures [6].
There are also some directives regulatingaccounting policies of commercial entities (including banks). These are:
1) the Fourth Council Directive [7],
2) the Seventh Council Directive [8],
3) the Eighth Council Directive [9],
4) the Fourth-Bis Directive [10].
The 1 - 3 directives refer to allcommercial entities and the 4 th regulates banking activity. It givesthe framework for banks 'financial statements. It makes banks disclose somespecial, specific for credit institutions, as income statement and balancesheet positions. According to that directive every bank's financial statementsmaterial differs from that of В«normalВ» enterprise. Due to that solution thereader of financial statement may discover those parts of banking activity thatgenerate incomes and losses.
Since 1992 over 100 countries haveimplemented the Basel Capital Accord. One can say that generally the documentdeals with bank capital level and its adequacy to the business size. The FirstBasel Capital Accord focused on the total amount of bank capital, which isvital in reducing the risk of bank insolvency and the potential cost of abank's failure for depositors. It emphasized single risk measure [11]. Atthe end of 2001 the Committee released another, newer version which is calledthe Second Capital Accord. It is considered to be more flexible to the modern,changeable world of business. It also allows banks to implement their own,internal methodologies on measuring the risk exposure.
The structure of the new Accord consistsof three pillars:
1) minimum capital requirement,
2) supervisory review process,
3) market discipline.
These three pillars together shouldcontribute to the safety of international financial system.
As we consider the internationalregulations on a single commercial bank's situation, we do emphasize the firstpillar, and briefly summarize the rest.
The first pillar of the Accord wasimplemented in almost entire world of business. According to this many nationalsupervisory bodies demand that the banks keep capital adequacy on at least 8% level.But there has been a great change in defining the capital adequacy. Before2001, supervisory bodies described it as total bank's capital over weightedaverage in assets and off-balance sheet liabilities. The new Accord differsslightly, because right now the capital adequacy is defined as bank's capitalover total of credit, market and operational risks. The temporary problem ishow to measure these kinds of banking risks.
The Capital Accord introduces new modelsof measuring the risks:
1. The list of approaches to measurecredit risks:
a) standardized approach;
b) foundation internal rating basedapproach;
c) advanced internal rating basedapproach.
2. The list of approaches to measuremarket risks:
a) standardized approach;
b) internal models approach.
3. The list of approaches to measureoperational risks:
a) basic indicator approach;
b) standardized approach.
c) internal measurement approach.
The first pillar is generally accepted allover the world and almost every commercial bank must keep its capital of 8% ofrisk-weighted assets.
That requirement is very important forbank's management, because when they have very poor (of low quality) credit(And other assets) portfolio, they must either raise the capital or releasethat asset. Otherwise, they may face very serious consequences, includinglicense withdrawal.
But new Accord allows banks to establishtheir own systems of calculating probability of creditors collapse. Accordingto this banks may implement external or even internal ratings into theirclients evaluations. If they do this, they may create new, much more flexible,systems of calculating provisions for likely bad debts.
The second pillar В«Supervisory reviewprocess В», considers how national supervisory bodies should ensure that eachbank implement Basel recommendations. As the new Accord stresses the importanceof bank's own systems for calculating capital adequacy, the role of supervisorshas dramatically changed. Instead of being standards setters, they must onlyevaluate and consult appropriateness of these systems.
The last, the third pillar concentrates onmarket discipline as a power, which push banks into clear and fair disclosureof all risks. This is the power of market that should make banks interested inpublishing more information covering banks 'risk profiles and capital adequacy.
As we can see, the Basel Committeepropositions, which in fact are not obligatory to any single bank, have a hugeinfluence on their activity, because many national supervisors state them as abench-mark.
And now let's consider the InternationalAccounting Standards Board's principles.
The international Accounting StandardsBoard (IASB), previously the International Accounting Standard Committee (IASC)an independent standard setting body. It issues the International FinancialReporting Standards (IFRS), previously the International Accounting Standards(IAS) covers main problematic areas and advises how entities should disclose,measure and present different accounting positions. Among them (are four standardsdeeply connected with banking activity:
1. IFRS 30 - Disclosures in the FinancialStatements of Banks and Similar Financial Institutions [12].
2. IFRS 32 - Financial Instruments:Disclosure and Presentation [13.]
3. IFRS 39 - Financial Instruments: Recognitionand Measurement [14].
4. IFRS 37 - Provisions, ContingentLiabilities and Contingent Assets [15].
The international Financial ReportingStandard 30 - Disclosures in the Financial Statements of Banks and SimilarFinancial Institutions, should be applied in the financial statements of allbanks (and other institutions which are allowed to credit and receive deposits.This standard describes what kind of information has to be included in banks 'financial statements. These are:
1) in the income st...
