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Reconsidering the Prudential Filter for the Cash Flow Hedge Reserve in View of the Purpose of Banking Regulation

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  3. Credit and Capital Markets – Kredit und Kapital
  4. Vol. 54, Issue 2
  5. pp. 265–299

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Knobloch, A., Krauß, F. Reconsidering the Prudential Filter for the Cash Flow Hedge Reserve in View of the Purpose of Banking Regulation. Credit and Capital Markets – Kredit und Kapital, 54(2), 265-299. https://doi.org/10.3790/ccm.54.2.265
Knobloch, Alois Paul and Krauß, Felix "Reconsidering the Prudential Filter for the Cash Flow Hedge Reserve in View of the Purpose of Banking Regulation" Credit and Capital Markets – Kredit und Kapital 54.2, 2021, 265-299. https://doi.org/10.3790/ccm.54.2.265
Knobloch, Alois Paul/Krauß, Felix (2021): Reconsidering the Prudential Filter for the Cash Flow Hedge Reserve in View of the Purpose of Banking Regulation, in: Credit and Capital Markets – Kredit und Kapital, vol. 54, iss. 2, 265-299, [online] https://doi.org/10.3790/ccm.54.2.265
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Reconsidering the Prudential Filter for the Cash Flow Hedge Reserve in View of the Purpose of Banking Regulation

Knobloch, Alois Paul | Krauß, Felix

Credit and Capital Markets – Kredit und Kapital, Vol. 54 (2021), Iss. 2 : pp. 265–299

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Article Details

Publisher Name
Duncker & Humblot
DOI
https://doi.org/10.3790/ccm.54.2.265
Language
English
Pages
35
Keywords

Author Details

Prof. Dr. Alois Paul Knobloch, Saarland University, Chair of Accounting and Finance, Campus B4 1, D-66123 Saarbrücken.

Dr. Felix Krauß, Dr. Kleeberg & Partner GmbH, Augustenstraße 10, D-80333 München.

References

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  35. Agarwal, S./Chomsisengphet, S./Liu, C./Ghon Rhee, S. G. (2007): Earnings management behaviors under different economic environments: Evidence from Japanese banks, Journal of Applied Econometrics, Vol. 16(3), 429–443.  Google Scholar
  36. Albrecht, P./Maurer, R. (2016): Investment- und Risikomanagement, 4th ed., Stuttgart.  Google Scholar
  37. Andrae, S./Krösl, F. (2016): Bestandteile und Mindesthöhe der Eigenmittel, in: Grieser, S./Heemann, M. (eds.): Europäisches Bankaufsichtsrecht, Frankfurt on Main, 463–546.  Google Scholar
  38. Basel Committee on Banking Supervision [BCBS] (2006): International Convergence of Capital Measurement and Capital Standards, A Revised Framework, Comprehensive Version, https://www.bis.org/publ/bcbs128.pdf.  Google Scholar
  39. Brown, C./Dinç, S. (2011): Too many to fail? Evidence of regulatory forbearance when the banking sector is weak, Review of Financial Studies, Vol. 24(4), 1378–1405.  Google Scholar
  40. Bundesanstalt für Finanzdienstleistungsaufsicht (2019): Allgemeinverfügung zur Quote des inländischen antizyklischen Kapitalpuffers nach § 10d KWG of 28 June 2019, Gz. R 1-AZB 1134–2019/0001, www.bafin.de.  Google Scholar
  41. Bundesanstalt für Finanzdienstleistungsaufsicht (2020): Allgemeinverfügung zur Quote des inländischen antizyklischen Kapitalpuffers nach § 10d KWG of 31 March 2020, Gz. IFR 2-QA 2102-2020/0002, www.bafin.de.  Google Scholar
  42. Bundesregierung (2006): Entwurf eines Gesetzes zur Umsetzung der neu gefassten Bankenrichtlinie und der neu gefassten Kapitaladäquanzrichtlinie, German Bundestag document No 16/1335.  Google Scholar
  43. Bushman, R. M./Landsman, W. R. (2010): The pros and cons of regulating corporate reporting: a critical review of the arguments, Accounting and Business Research, Vol. 40(3), 259–273.  Google Scholar
  44. Bushman, R. M./Williams, C. D. (2012): Accounting discretion, loan loss provisioning, and discipline of Banks’ risk-taking, Journal of Applied Econometrics, Vol. 54(1), 1–18.  Google Scholar
  45. Commission Implementing Regulation (EU) No 1423/2013 of 20 December 2013 laying down implementing technical standards with regard to disclosure of own funds requirements for institutions according to Regulation (EU) No 575/2013 of the European Parliament and of the Council, OJ EU L 355, 31.12.2013, 60.  Google Scholar
  46. Council Directive 93/6/EEC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions, OJ EC L 126, 26.05.2000, 1.  Google Scholar
  47. Directive 2000/12/EC of 15 March 1993 on the capital adequacy of investments firms and credit institutions, OJ EC L 141, 11.06.1993, 1.  Google Scholar
  48. Ernst & Young (2021): International GAAP 2021, Vol. 3, Hoboken.  Google Scholar
  49. Fischer, R./Boegl, M. (2017): Aufsicht über Kredit- und Finanzdienstleistungsinstitute, in: Schimansky, H./Bunte, H.-J./Lwowski, H. J. (eds.): Bankrechts-Handbuch, 5th ed., München, para. 23.  Google Scholar
  50. Fülbier, R. U./Gassen, J. (2007): Das Bilanzrechtsmodernisierungsgesetz (BilMoG): Handelsrechtliche GoB vor der Neuinterpretation, Der Betrieb, Vol. 60(48), 2605–2612.  Google Scholar
  51. Graf-Tiedtke, B. (2005): Bankbilanzanalyse, in: Löw, E. (ed.): Rechnungslegung für Banken nach IFRS, 2nd ed., Wiesbaden, 1037–1124.  Google Scholar
  52. Hartenberger, H. (2020): § 3 Finanzinstrumente, in: Brune, J. et al. (eds.): Beck’sches IFRS-Handbuch – Kommentierung der IFRS/IAS, 6th ed., München.  Google Scholar
  53. Hartmann-Wendels, T./Pfingsten, A./Weber, M. (2019): Bankbetriebslehre, 7th ed., Berlin.  Google Scholar
  54. Hull, J. C. (2018): Options, Futures, and Other Derivatives, 10th ed., New York.  Google Scholar
  55. Institut der Wirtschaftsprüfer in Deutschland e.V. [IDW; Institute of Public Auditors in Germany, Incorporated Association] (2017): Einzelfragen der Bilanzierung von Finanzinstrumenten nach IFRS 9 (IDW RS HFA 48), IDW Life, Vol. 19(5), 646–701.  Google Scholar
  56. Jones, D. (2000): Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues, Journal of Banking & Finance, Vol. 24(1–2), 35–58.  Google Scholar
  57. Knobloch, A. P./Osinski, S. (2016): Anschaffungskosten bei Erwerben über unbedingte Termingeschäfte, Betriebswirtschaftliche Forschung und Praxis, Vol. 68(5), 516–546.  Google Scholar
  58. Kolb, R. W./Overdahl, J. A. (2007): Futures, Options, and Swaps, 5th ed., Malden (MA).  Google Scholar
  59. Krauß, F. (2019a): Aufsichtsrechtlich motivierte Bilanzpolitik – Wirkungsanalyse materieller Bilanzpolitik im IFRS-Abschluss hinsichtlich der Mindestkapitalanforderungen der CRR, Berlin.  Google Scholar
  60. Krauß, F. (2019b): Regulatory Capital Management: Fair Value Measurement and Regulatory Capital Ratios, Credit and Capital Markets, Vol. 52(3), 375–421.  Google Scholar
  61. Kuhn, S./Hachmeister, D. (2015): Rechnungslegung und Prüfung von Finanzinstrumenten – Handbuch nach IFRS, HGB und EMIR, Stuttgart.  Google Scholar
  62. Laux, C./Leuz, C. (2009): The crisis of fair-value accounting: Making sense of the recent debate, Accounting, Organizations and Society, Vol. 34(6–7), 826–834.  Google Scholar
  63. Lüdenbach, N./Hoffmann, W.-D./Freiberg, J. (2021): IFRS Kommentar – Das Standardwerk, 19th ed., Freiburg/München/Stuttgart.  Google Scholar
  64. Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards, OJ L 243, 11.09.2002, 1 (amended by Regulation (EC) No 297/2008 of the European Parliament and of the Council of 11 March 2008, OJ L 97, 09.04.2008, 62).  Google Scholar
  65. Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, OJ L 176, 27.06.2013, 1 (lastly corrected by corrigendum, OJ L 405, 02.12.2020, 79; lastly amended by Regulation (EU) 2020/873 of the European Parliament and of the Council of 24 June 2020 amending Regulations (EU) No 575/2013 and (EU) 2019/876 as regards certain adjustments in response to the COVID-19 pandemic, OJ L 204, 26.06.2020, 4).  Google Scholar
  66. Sopp, G. (2010): IFRS im Bankenaufsichtsrecht, Hamburg.  Google Scholar
  67. Steffen, S./Steinruecke, L. (2015): Funktionsweise und Einschätzung des Comprehensive Assessment, Zeitschrift für betriebswirtschaftliche Forschung, Vol. 67(4), 418–443.  Google Scholar
  68. Wahrenburg, M. (2019): Die Reformen der Kapitalregulierung von Kreditinstituten seit der Finanzkrise, Zeitschrift für Bankrecht und Bankwirtschaft (Journal for Banking Law and Banking), Vol. 31(2), 81–160.  Google Scholar

Abstract

Common Equity Tier 1 capital of credit institutions is adjusted by the prudential filter for the cash flow hedge reserve according to art. 33(1)(a) CRR. Thereby, fair value changes of hedging instruments, especially of derivatives, are neutralized by imputed fair value changes of future cash flows that are part of a cash flow hedge. However, these future cash flows are (mostly) expected to occur under market conditions and, thus, imputed fair value changes are not reflected in changes of present values derived from real transactions that exist at the time of the regulatory capital calculation. As a result, positive effects on Common Equity Tier 1 capital can be viewed critically in regard to the prudence principle of banking supervision if an initial reduction in Common Equity Tier 1 capital due to losses from hedging instruments is corrected. Furthermore, the adjustment is case specific and depends on the hedge effectiveness, which is questionable because of consistency reasons. To solve these weaknesses, we suggest to eliminate the prudential filter for the cash flow hedge reserve as a whole. This would lead to a better quality of Common Equity Tier 1 capital by improving its loss absorbency and as a side effect to a reduction in complexity enhancing supervision through regulatory authorities and market discipline. Furthermore, we demonstrate the impact that the proposed abolishment of the prudential filter for the cash flow hedge reserve would have on the Common Equity Tier 1 capital ratios of the largest European banks in 2014–2019

Table of Contents

Section Title Page Action Price
Alois Paul Knobloch / Felix Krauß: Reconsidering the Prudential Filter for the Cash Flow Hedge Reserve in View of the Purpose of Banking Regulation 1
Abstract 1
I. Introduction 2
II. The Cash Flow Hedge Reserve According to IFRS 9 4
1. Concept and Nature of the Cash Flow Hedge Reserve 4
2. Accounting for the Cash Flow Hedge Reserve 7
III. Regulatory Treatment of the Cash Flow Hedge Reserve 8
IV. Critical Evaluation on the Basis of the Regulatory Purpose 9
1. Regulatory Objectives and the Role of the Regulatory Capital Ratios 9
2. Consistency Issues Within CET 1 due to the Prudential Filter for the Cash Flow Hedge Reserve 1
3. Should the Hedged Item of a Cash Flow Hedge Influence CET 1? 1
V. Effects on European Banks 1
VI. Summary and Conclusion 3
References 3

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