Behavioural changes of financial
institutions in response to changes
in accounting
Gérard GIL
Group Chief Accountant Officer
Group BNP Paribas
Workshop on Accounting Risk Management and prudential regulation 1
Basel, 11-12 November 2005
1. Behavioural changes of financial institutions
resulting from changes in accounting
• A relatively new issue in Europe
• Little evidence based on specific studies
• IFRS : a real life case study
• External observations make it difficult to appreciate the real
motivation of a change in business behaviour
Workshop on Accounting Risk Management and Prudential Regulation
2
Basel, 11 – 12 November 2005
2. Possible reflexions following Anne Beatty study
• Academic study demonstrating that the interaction between
accounting and business behaviour is not only an intuition
• Accounting is not just a « language », it also conditions or
influences
- Business behaviour
- Social behaviour
- Competition between companies and « economies »
• In a profit driven world, management is concerned by the way
results of operations are presented and interpreted by the
market
- Accounting rule is business rule
Workshop on Accounting Risk Management and Prudential Regulation
3
Basel, 11 – 12 November 2005
3. A few illustrations of changes in behaviour as a
result of the adoption of IFRS
Accounting changes may or have affected
- The offer of financial products
- The social behaviour of a company
- Competitive distorsion
- The underlying rationale of operations or strategies
Workshop on Accounting Risk Management and Prudential Regulation
4
Basel, 11 – 12 November 2005
3.1 Accounting changes may affect the offer of financial products
- Markets have an adverse attitude to the volatility of the profit and loss
account
- A full fair value model applied to the banking book would create fake
volatility in the P/L in the context of demand deposit hedging
- Banks may reduce their fixed rate loans exposure, and pass to their clients
more variable rate exposure (e.g. mortgage loans, investment loans)
- Limitation of fixed rate loans in a proportion acceptable with volatility
expectation
- Major change for the banking industry in the context of a fixed rate
economic environment
An opportunity for banks not required to comply with IFRS or non-listed
Workshop on Accounting Risk Management and Prudential Regulation
5
Basel, 11 – 12 November 2005
3.2 Accounting changes have affected the social
behaviour of companies
• Banks are disadvantaged through paying differed bonuses in
the form of shares (IFRS 2) rather than of cash for past
performance of traders
• Caracteristics of stock options need to be modified to reduce
the P&L charge. The provision of such benefits may well be
reduced globally
• Healthcare scheme based on the principle of « solidarity
between generations » had to be modified in France to avoid
being qualified as defined benefit plans in respect of retirees
Workshop on Accounting Risk Management and Prudential Regulation
6
Basel, 11 – 12 November 2005
3.3 Accounting changes may create competitive distorsion
• Business combinations : generalisation of the purchase
accounting method gives an advantage to already concentrated
industries
1. Pooling of interest have given an incentive to growth to some
industries in certain economies
2. Purchase accounting method favours the « big » players
• Trading : synthetic instruments marked to model
• New Day One profit rules lead to differing of profits
• Development of strict rules to qualify observable parameters may
transfer business to non regulated industry (hedge funds)
• Tailor made synthetic instruments (CDO’s, Power Duals…) may
become less secure for investors
Workshop on Accounting Risk Management and Prudential Regulation
7
Basel, 11 – 12 November 2005
3.4 Accounting changes may lead to unrational behaviour
• Accounting rules induce banks to develop and engage in
practices solely because of the accounting qualification
implications
1. Cash flows hedge of demand deposits need a variable rate asset
portfolio
2. If such portfolio does not naturally exist, it has to be artificially
created
• Accounting rules may result in companies not hedging their
future risks
- Future turnover in a foreign currency needs to be protected against
exchange rate fluctuations. Accounting of the change in value of the
protection in an inadequate period may discourage the hedging
strategy
Workshop on Accounting Risk Management and Prudential Regulation
8
Basel, 11 – 12 November 2005
CONCLUSION
• Empirical evidence of the influence of accounting on business
behaviour is demonstrated
• Standard setters cannot disregard the consequences of standard
changes on economical behaviour changes
• Accounting standards « condition » economic models
• Universal accounting standards would lead to uniformization of
accounting models
What is the role of accounting standards ?
- Shouldn’t they be adapted to the regional economic model ?
Workshop on Accounting Risk Management and Prudential Regulation
9
Basel, 11 – 12 November 2005