Accounting and Economic Banking Book Management

The banking book is the core component of the traditional banking business. With banking book activities, banks largely assume credit risks and generate a margin from risk transformation. Furthermore, income from the strategic acquisition of interest rate risks as part of maturity transformation can be achieved. The third possibility for generating income from the banking book exists with the assumption of foreign currency risks. All sources of income require adequate controlling, limiting, and management of the associated risks. On the one hand, bank regulators have set various requirements for reporting and capital to limit these risks; on the other, these risks also raise the question of how they can be correctly reflected in financial accounting.

Integrated Banking Book Management as a Means of Communication for the Capital Market

If the different external requirements and the internal controlling of results are designed and implemented independently of each other, there is a risk that different results will leave management and also investors uncertain about what the relevant figure is. Since regulatory requirements usually have at least one secondary condition for economic management, there is a fundamental connection. With accounting, too, there is the question of how the internal and external dimensions can be combined. This can certainly lead to conflicts of objectives if, on the one hand, banks use their financial statements as a means of communication for analysts and investors while, on the other, the internal controlling of one of the most important income components cannot be found in an understandable way in the financial reporting. A solution to this – if possible – lies in harmonization of the requirements and the standardized reconciliation and explanation of the remaining differences.

Regulatory and Statutory Requirements for Banking Book Management

The following requirements represent major fundamentals and aspects that have potential for integration and harmonization:

  • Capital requirements for credit risks according to CRR/Pillar I: The requirements are limited, on the one hand, to the business volume; on the other, there is a strong link to accounting since the regulatory capital is based on the balance sheet capital, and the corresponding exposure values for the risk assets are determined by the book value. In the case of institutions that use the IRBA method, there is the question of data harmonization for accounting and regulatory calculation of the expected credit losses.
  • BFA 3 – loss-free valuation of the banking book and IRRB: On the one hand, the German Central Bank [Bundesbank] requires a regular test for pending losses in the banking book as part of accounting under the German Commercial Code [Handelsgesetzbuch, HGB] and relies here either on a payment flow or cash value method with a focus on the interest rate risk. On the other, the requirements of the IRRBB call for a comparable calculation with additional interest rate shocks in order to determine the risks from maturity transformation as part of Pillar II.
  • Stress tests: Individual stress tests – irrespective of whether they are initiated internally or externally – usually take account of a number of dimensions.
  • Hedge accounting: Particularly in the area of interest rate risks, hedge accounting in accordance with IFRS or valuation units in accordance with the German Commercial Code [Handelsgesetzbuch, HGB] offer the possibility of breaking through the regular valuation requirements and showing the correct economic result on the balance sheet and avoiding fluctuations in capital resulting from balance sheet volatility.
  • Controlling of results: The controlling of results is regularly connected to accounting. When results are controlled, this involves obtaining relevant input data from the accounting, while MARisk simultaneously requires a reconciliation of the internally and externally reported result.

Support by FAS AG with Integration of Banking Book Management

FAS AG has extensive experience with integration of regulatory and accounting requirements into banking book management. The range of services includes design and implementation of individual requirements, ad-hoc support with stress tests (for example), and complete design of an integrated method for combination and harmonization of individual regulatory requirements with economic controlling. Against this backdrop, FAS AG provides a wide range of support, beginning with the definition of strategic goals for banking booking management, extending to a detailed plan for how to achieve those goals, and culminating in support for the technical implementation and test runs.

 Dominik Konold Partner