ANNUAL REPORT 2008 - Polymer Bank Notes of the World

2.2 BANKINGCAPITAL REQUIREMENTS DIRECTIVEThe Capital Requirements Directive (CRD) aimsto safeguard the financial soundness of banks andinvestment firms by closely aligning regulatorycapital requirements with the underlying risksthat these institutions face. In October 2008 theEuropean Commission adopted a proposal toamend certain provisions of the CRD, to take intoaccount, among other things, the lessons learnedfrom the financial crisis. With regard to thelarge exposures regime, banks’ exposures to anysingle party will be restricted, resulting also inlimitations in the interbank market. Furthermore,clear EU-wide criteria will be introduced forassessing the eligibility of hybrid capital, withthe aim of improving the quality of banks’ ownfunds. In the area of risk management, revisionsapply to liquidity risk management and thetreatment of securitised products. With regardto the former, a number of provisions havebeen introduced, in line with the ongoing workof the BCBS and CEBS. With regard to thelatter, provisions aim to improve transparency,strengthen the risk management processesof originators and investors alike, and betteralign incentives along the securitisation chain.Finally, the Commission’s proposal foreseesthe establishment of “colleges of supervisors”for all cross-border banks and a clarification ofthe role of competent authorities with the aimof strengthening the supervision of cross-borderbanking groups. The ECB was consulted on thedraft proposal of the Commission. In providingits input, the ECB benefited from work carriedout by the BSC in the context of two reports itpublished in the fourth quarter of 2008.In November the BSC published a report on EUbanks’ liquidity stress-testing and contingencyfunding plans. The report contains a detaileddescription of liquidity stress-testing techniquesand liquidity contingency funding plans, whichare highly diverse across EU banks. It alsoanalyses the adequacy of liquidity stress-testingtechniques and liquidity contingency fundingplans with regard to the absorption of liquidityshocks, in particular during the market turmoil,reaching the conclusion that there is room forimprovement in both areas.In December the BSC produced a report on the“originate and distribute model”, examining thedevelopment of the model both during the timeof its growth in popularity and in the contextof the turmoil in the financial markets. Thereport presents the incentive structure and thevarious conflicts of interest between the actorsin the model. It proposes a number of marketsolutions and policy measures that could playan important role in reducing the effects of theconflicts of interest.ACCOUNTINGThe financial market turmoil has confirmedthe importance of accounting standards froma financial stability perspective. In particular,issues related to the enhanced disclosure ofexposure to structured products, the treatmentof off-balance-sheet vehicles and fair-valueaccounting when markets become inactiveor illiquid have been identified by both theECOFIN Council’s roadmap and the FSF asareas requiring attention.In response to a request by the FSF, theInternational Accounting Standards Board(IASB) set up an Expert Advisory Panel, inwhich the ECB participates, which issuedguidance on the application of fair-valueaccounting when markets became inactive at theend of October 2008.Another issue relates to the importance ofensuring a level playing-field globally withregard to accounting standards, in particularon both sides of the Atlantic. In this context,the IASB adopted decisions aimed at reachingconsistency between the International FinancialReporting Standards (IFRS) and the USGenerally Accepted Accounting Principles (US-GAAP) on the reclassification of items acrossaccounts. In addition, the IASB set up a High-Level Advisory Group to help to ensure thatreporting issues arising from the global economiccrisis are considered in an internationallycoordinated manner. Furthermore, the European156 ECBAnnual Report2008