Politics

IASB adopts new rules

In mid May, the International Accounting Standards Board (IASB) adopted several new accounting standards that were set up as a consequence of the financial crisis. Key points include new Fair Value Measurements (fair value) and new rules for consolidation of shareholdings. In line with the U.S. Financial Accounting Standards Board (FASB), the IASB formulated the IFRS 13 standard, that in troubled markets where adequate price discovery and therefore quantifying the fair value is not possible, internal methods of calculating the fair value should be allowed. IFRS 13 is now to merge the rules hitherto distributed over different accounting standards. The IASB and FASB are, however, divided over the rules for consolidation. The IASB had earlier come under criticism over the relevant IFRS standards 10, 11 and 12. Here, discretion as to whether a company should be consolidated is significantly expanded and made strongly dependent on circumstances. The new rules will make it difficult for analysts and investors to compare company financial statements clearly, was the criticism. The FASB has already announced it does not want to apply the standards to American companies.

CDS short selling again allowed

At their meeting in mid May, the EU finance ministers were able to agree that naked short selling of equities and government bonds should be banned altogether. Germany, in May 2010, set a ban on naked short selling of stocks, bonds and credit default derivatives (credit default swaps, CDSs) on track. Now Berlin has demanded that naked short selling of so-called CDSs on sovereign debt should be banned throughout Europe, but failed in Brussels. In CDS short sales, speculators buy the credit derivative on a government bond, relying on a deterioration in credit quality of the country concerned, thereby making the insurance gain in value. Some experts have identified such CDS speculation as a reason for the financial crisis. Others argue that not speculation in CDSs but in government bonds themselves could have exacerbated the crisis. A prohibition of such CDS short-selling could make the liquidity of government bonds fall significantly, creating problems in refinancing public debt, is the fear. In order to advance the talks, Germany has accepted the Council’s position for the time being, so that negotiations with the EU Commission and EU Parliament can start. Germany, however, had it minuted that it seeks a ban on uncovered short sales of CDSs. In early March the Economic and Monetary Affairs Committee in Parliament also voted for such a ban.

Fight over bank regulation

Since the end of December 2010, the new keystones for banking regulation, known as the Basel III rules, have been available. The implementation is still problematic. In the latest chapter in the debate over the capital and liquidity rules, a fiery letter is doing the rounds. In it, finance ministers from seven EU countries, including Britain, Spain and Sweden, but not Germany, reject the European Commission’s bill: it is a retreat from the Basel-III regulations, the argument goes, and thus hurts financial stability in Europe and undermines the credibility of the EU. The stumbling block is particularly the desire to see Basel III as the maximum rule, so that individual Member States generally cannot require higher capital ratios from their banks. The Seven want to see Basel III as a minimum requirement and in principle demand much more freedom for national watchdogs. Another criticism is that the Commission has only presented a regulation, not a directive. While a regulation will be directly implemented into national law, the countries want the freedom a directive gives to formulate a law of their own. The responsible Internal Market Commissioner Michel Barnier claims against this that his plans come very close to the Basel III rules. They provide that banks must in the future hold seven percent common equity, and that this capital be liable first for losses. In addition, it should be possible in the event of market turmoil to impose an emergency regulation on faltering banks, under which they would be subject to conditions. The German banking associations also secured that the new rules should apply regardless of the legal form of the bank. Thus in future non-joint-stock groups such as the savings and cooperative banks could not count silent contributions towards their hard core capital, if they do not meet these criteria.