Міністерство освіти і науки України

НТУ «ХАРКІВСЬКИЙ ПОЛІТЕХНІЧНИЙ ІНСТИТУТ»

Кафедра «Англійської мови і ділової комунікації»

Тема: «ACCOUNTING RULES FOR REGULATIONS IN BANKING

SECTOR»

 

Харків – 2008

As many banks and other credit institutions start offering their services globally, they should change the way their business is conducted. This is the main reason way different international rules become more and more popular. Among the others, Basel Committee on Banking Supervision and the International Accounting Standards Board (IASB) issue many important rules that are implementing into banking sector. This paper is going to present the most important Basel Committee’s and the IASB’s standards which affect banking activity.

As for the European Union’s legislation for banking sector, it’s necessary to point out the following.

As more and more countries want to join the European Union, they usually try to apply European law their own law system. That situation refers to banking system, too. There are several European Union Directives which regulate banking activity. One of the most important is the First Council Directive on the coordination of the law, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions [1] and the Second Council Directive [2]. They consist of framework for banking institutions having their headquarters either inside or outside the European Union.

Other European directives regulate deposit-guarantee schemes [3], amount of banks’ own fund [4], supervision of credit institutions on a consolidated basis [5], large exposures [6].

There are also some directives regulating accounting policies of commercial entities (including banks). These are:

1) the Fourth Council Directive [7],

2) the Seventh Council Directive [8],

3) the Eighth Council Directive [9],

4) the Fourth-Bis Directive [10].

The 1 – 3 directives refer to all commercial entities and the 4th regulates banking activity. It gives the framework for banks’ financial statements. It makes banks disclose some special, specific for credit institutions, as income statement and balance sheet positions. According to that directive every bank’s financial statements material differs from that of «normal» enterprise. Due to that solution the reader of financial statement may discover those parts of banking activity that generate incomes and losses.

Since 1992 over 100 countries have implemented the Basel Capital Accord. One can say that generally the document deals with bank capital level and its adequacy to the business size. The First Basel Capital Accord focused on the total amount of bank capital, which is vital in reducing the risk of bank insolvency and the potential cost of a bank’s failure for depositors. It emphasized single risk measure [11]. At the end of 2001 the Committee released another, newer version which is called the Second Capital Accord. It is considered to be more flexible to the modern, changeable world of business. It also allows banks to implement their own, internal methodologies on measuring the risk exposure.

The structure of the new Accord consists of three pillars:

1) minimum capital requirement,

2) supervisory review process,

3) market discipline.

These three pillars together should contribute to the safety of international financial system.

As we consider the international regulations on a single commercial bank’s situation, we do emphasize the first pillar, and briefly summarize the rest.

The first pillar of the Accord was implemented in almost entire world of business. According to this many national supervisory bodies demand that the banks keep capital adequacy on at least 8% level. But there has been a great change in defining the capital adequacy. Before 2001, supervisory bodies described it as total bank’s capital over weighted average in assets and off-balance sheet liabilities. The new Accord differs slightly, because right now the capital adequacy is defined as bank’s capital over total of credit, market and operational risks. The temporary problem is how to measure these kinds of banking risks.

The Capital Accord introduces new models of measuring the risks:

1. The list of approaches to measure credit risks:

a) standardized approach;

b) foundation internal rating based approach;

c) advanced internal rating based approach.

2. The list of approaches to measure market risks:

a) standardized approach;

b) internal models approach.

3. The list of approaches to measure operational risks:

a) basic indicator approach;

b) standardized approach.

c) internal measurement approach.

The first pillar is generally accepted all over the world and almost every commercial bank must keep its capital of 8% of risk-weighted assets.

That requirement is very important for bank’s management, because when they have very poor (of low quality) credit (and other assets) portfolio, they must either raise the capital or release that asset. Otherwise, they may face very serious consequences, including license withdrawal.

But new Accord allows banks to establish their own systems of calculating probability of creditors collapse. According to this banks may implement external or even internal ratings into their clients evaluations. If they do this, they may create new, much more flexible, systems of calculating provisions for likely bad debts.

The second pillar «Supervisory review process», considers how national supervisory bodies should ensure that each bank implement Basel recommendations. ............