IAT FED

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Behavioural changes of financial institutions in
response to changesin accounting Gérard GIL
Group Chief Accountant Officer Group BNP Paribas
Workshop on Accounting Risk Management and
prudential regulation Basel, 11-12 November 2005
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• 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

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• 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

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• 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

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• 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

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• 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 PL 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

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• 3.3 Accounting changes may create competitive
  distorsion
• Business combinations generalisation of the
  purchase accounting method gives an advantage to
  already concentrated industries
• Pooling of interest have given an incentive to
  growth to some industries in certain economies
• 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 (CDOs, Power
  Duals) may become less secure for investors

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• 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
• Cash flows hedge of demand deposits need a
  variable rate asset portfolio
• 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

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• 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 ?
• - Shouldnt they be adapted to the regional
  economic model ?