Mr. Wayne Byres, Secretary General of the Basel Committee on Banking
Supervision, also mentioned in his speech that “a robust set of
international banking standards is critical for the future”.
http://www.bis.org/speeches/sp121106.pdf
In this sense, the International Financial Reporting Standards are a
very important step in the right direction of providing a homogenous
framework of accounting principles.
Nevertheless, as the 2008 Financial Crisis and Lehman Brothers
collapse sadly proved, in a globalized world the solvency of the
financial system relies on the solvency of its main agents, wherever
they operate.
In case of a serious solvency or liquidity issue in a systemic
financial agent, the malfunction of the liquidity channels would
spread to the global system in the very same day. The importance of
those systemic agents has been recognized by the regulatory
authorities, with higher capital and liquidity requirements and more
detailed supervision.
On the other hand as the quantitative easing cycles and rescue
packages have shown, sovereign monetary decisions generate currency
exchange rate fluctuations impacting the capital markets.
Those currency fluctuations have a negative impact in the solvency of
banks, as they increase their Market Risk capital consumption.
Simplifying, the volatility of the portfolio increases the Value at
Risk of the portfolio and consequently the capital requirements of the
bank.
This is a big issue, as in my opinion the world is facing a long
period of capital scarcity and wasting capital is not an option. If
currencies exchange rates fluctuations are a root cause for wasting
capital, mechanisms for minimizing those fluctuations will have to be
implemented.
But monetary policies, including implementing quantitative easing
measures, are sovereign decisions.
Coordinate monetary policies for reducing currency prices fluctuation
will require countries to give sovereignty to supranational entities
responsible of implementing and supervising the coordinated measures.
This will take time, one of the reasons why we are in a long systemic
crisis.
On the other hand, what’s the point for a global bank, to report its
financial statements only in a local currency, when the value of that
currency relies in a sovereign (local) decision?
Reporting the value of a portfolio in global capital markets requires
disclosing separately the effect of currency price fluctuations on the
value of the portfolio, and the intrinsic value of the banks
investments (many of them in foreign currencies). Both effects are
important and if one of them hides the other, very relevant
information will be lost.
SAP has understood the importance of this issue providing the release
8 of Bank Analyzer with strong Multi Currency Accounting
functionalities; also a very important step in the right direction.
Looking forward to read your opinions.
K. Regards and Merry Christmas.
Ferran.
Supervision, also mentioned in his speech that “a robust set of
international banking standards is critical for the future”.
http://www.bis.org/speeches/sp121106.pdf
In this sense, the International Financial Reporting Standards are a
very important step in the right direction of providing a homogenous
framework of accounting principles.
Nevertheless, as the 2008 Financial Crisis and Lehman Brothers
collapse sadly proved, in a globalized world the solvency of the
financial system relies on the solvency of its main agents, wherever
they operate.
In case of a serious solvency or liquidity issue in a systemic
financial agent, the malfunction of the liquidity channels would
spread to the global system in the very same day. The importance of
those systemic agents has been recognized by the regulatory
authorities, with higher capital and liquidity requirements and more
detailed supervision.
On the other hand as the quantitative easing cycles and rescue
packages have shown, sovereign monetary decisions generate currency
exchange rate fluctuations impacting the capital markets.
Those currency fluctuations have a negative impact in the solvency of
banks, as they increase their Market Risk capital consumption.
Simplifying, the volatility of the portfolio increases the Value at
Risk of the portfolio and consequently the capital requirements of the
bank.
This is a big issue, as in my opinion the world is facing a long
period of capital scarcity and wasting capital is not an option. If
currencies exchange rates fluctuations are a root cause for wasting
capital, mechanisms for minimizing those fluctuations will have to be
implemented.
But monetary policies, including implementing quantitative easing
measures, are sovereign decisions.
Coordinate monetary policies for reducing currency prices fluctuation
will require countries to give sovereignty to supranational entities
responsible of implementing and supervising the coordinated measures.
This will take time, one of the reasons why we are in a long systemic
crisis.
On the other hand, what’s the point for a global bank, to report its
financial statements only in a local currency, when the value of that
currency relies in a sovereign (local) decision?
Reporting the value of a portfolio in global capital markets requires
disclosing separately the effect of currency price fluctuations on the
value of the portfolio, and the intrinsic value of the banks
investments (many of them in foreign currencies). Both effects are
important and if one of them hides the other, very relevant
information will be lost.
SAP has understood the importance of this issue providing the release
8 of Bank Analyzer with strong Multi Currency Accounting
functionalities; also a very important step in the right direction.
Looking forward to read your opinions.
K. Regards and Merry Christmas.
Ferran.
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