Credit Crunch

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The Financial Stability Forum (FSF) issues report to addresses credit crisis

Eight months after the global credit crisis began, official reports have started to appear that seek to analyze the market turbulence and take action to limit its impact.

The most significant pronouncement was the report on enhancing market and institutional resilience issued by the Financial Stability Forum (FSF) in response to a request by the G7 finance ministers. This was prepared following extensive collaboration and fact-finding with different sectors involved in the credit crisis. The report details some 67 recommendations grouped under five headings:

  • Strengthening prudential oversight of capital, liquidity and risk management
  • Enhancing transparency and valuation
  • Changes in the role and uses of credit ratings
  • Strengthening the authorities' responsiveness to risks
  • Robust arrangements for dealing with stress in the financial system

The report is very action-orientated – responsibility for developing each of the recommendations is assigned to specific organizations, against a suggested timeline for action. The FSF will be monitoring progress and will prepare a further report by the end of this year.

The financial reporting recommendations are challenging. The International Accounting Standards Board (IASB) is charged with following up on most of these (see box below). In a separate communiqué, the G7 finance ministers have strongly endorsed the FSF’s report, placing even greater emphasis on the need for swift action.

The FSF report also recommends improved risk disclosures by banks and other market participants. It points to a separate report by the Senior Supervisors’ Group (a grouping of the banking regulators in France, Germany, Switzerland, UK and US) on leading practice disclosures for selected exposures. This report looks at examples of disclosures by major international financial institutions in the last reporting season and highlights what the group considers to be good practices.

PricewaterhouseCoopers financial instrument expert Pauline Wallace agrees that it is useful to share experience of how banks provided information in their disclosures beyond that required by the standards. ‘In the IFRS world, we should certainly be looking at the types of disclosures highlighted in the Senior Supervisors Group report and in the US SEC’s recent “Dear CFO letter”, to see if these will aid transparency around risk.’

The FSF report also calls on the largest audit firms to share with the International Auditing and Accounting Standards Board the audit approaches that they have used to address assurance and reporting issues resulting from the current market conditions. The idea is that this experience could be used to help enhance audit guidance.

Peter Wyman, PwC UK regulatory partner, added: ‘We have already started the process of sharing our experiences of the last reporting season with the international standard setters and regulatory organizations. That does not mean that new audit standards are needed, but there may be areas where it is useful to reflect in guidance the practices we have been following.’

You can find the full report on the Financial Stability Forum's website.

FSF recommendations to the IASB on improving accounting standards:

  • Improve the accounting and disclosure standards for off balance sheet vehicles on an accelerated basis and work with other standard setters toward international convergence
  • Strengthen standards to achieve better disclosures about valuations, methodologies and the uncertainty associated with valuations
  • Enhance guidance on valuing financial instruments when markets are no longer active. To this end, set up an expert advisory panel.

This article was taken from Issue 2 (2008) of PwC’s World Watch: Governance and Corporate Reporting.