IFRS Academy, July 2010: Global Approach to Financial Reporting and Accounting for Financial Instruments

2. It represents the interests of some 5000 European banks: large and small, wholesale and retail, local and cross-border financial institutions

3. It is committed to supporting EU policies to promote the single market in financial services in general and in banking activities in particular

4. It advocates free and fair competition in the EU and world markets and supports the banks' efforts to increase their efficiency and competitiveness.Tokyo, 28-29 July 2010 A global approach to financial reporting and accounting for financial instruments Roger KaiserEuropean Banking Federation 1

6. To improve quality of financial reporting

7. To enhance investors’ protection

8. To increase the possibilities to raise capital

9. To create efficient, deep and liquid securities markets and enhance their international competitiveness

10. Need for adopting a single set of accounting standards for companies willing to raise capital …2

11. GLOBAL APPROACH TO FINANCIAL REPORTINGKey Players in Accounting Standard-Setting 3 INTERNATIONAL e.a. EU NATIONAL US IAS / IFRS Local GAAP e.g. J-GAAP US-GAAP ACCOUNTING STANDARDS N’al Std-Setter (NSS) e.g. ASBJ IASB FASB STANDARD-SETTERS EC JFSA SEC REGULATORS

12. GLOBAL APPROACH TO FINANCIAL REPORTING US Convergence Strategy 4 INTERNATIONAL e.a. EU NATIONAL US IAS / IFRS Local GAAP e.g. J-GAAP US-GAAP ACCOUNTING STANDARDS N’al Std-Setter (NSS) e.g. ASBJ IASB FASB STANDARD-SETTERS EC SEC JFSA REGULATORS Convergence on Accounting Standards

13. GLOBAL APPROACH TO FINANCIAL REPORTING US Mutual Recognition Strategy 5 INTERNATIONAL e.a. EU NATIONAL US IAS / IFRS Local GAAP e.g. J-GAAP US-GAAP ACCOUNTING STANDARDS N’al Std-Setter (NSS) e.g. ASBJ IASB FASB STANDARD-SETTERS EC SEC JFSA REGULATORS Mutual Recognition on Accounting Standards

14. GLOBAL APPROACH TO FINANCIAL REPORTING EU Strategy Towards a Single Set of Accounting Rules Modernisation Directive IAS Regulation Fair Value Directive EC Communication “EU Financial reporting strategy: the way forward” Lisbon European Council 4th and 7th AccountingDirectives March 2000 June 2000 July 2002 2003 1978-1983 Sept. 2001 6

15. GLOBAL APPROACH TO FINANCIAL REPORTING EU Strategy : IAS Regulation & Modernisation Directive Regulation (EC) No 1606/2002 unlisted companies listed companies individual accounts consolidated accounts individual accounts consolidated accounts IAS/IFRS permitted (optionality for member states) IAS/IFRSrequired Directive 2003/51/EC: Modernization & updating of accounting rules 7

16. GLOBAL APPROACH TO FINANCIAL REPORTING EU Strategy: Endorsement process for IFRS SARG EFRAG technical level ARC political level EUROPEAN COMMISSION Regulations EUROPEAN PARLIAMENT IASB IFRIC Endorsementprocedure MEMBER STATES transposition MonitoringBoard 8

18. Set a target date of 30 June 2011 for resolving other issues

19. Enhance cooperation to facilitate Japan’s greater contribution to the international standard-setting processSource: JFSA

21. Preparation period: Minimum 3 years

22. 2015 or 2016: Beginning of mandatory application (if decided in 2012)Publication of Japan’s Roadmap (June 30, 2009) Source: JFSA

24. Key accounting issues highlighted during the crisis:

27. Categories of financial instruments

28. Held-for-trading (HFT)

29. Held-to-maturity (HTM)

30. Loans and receivables (L&R)

31. Available for sale (AFS)

32. Mixed measurement

33. HFT  FV through P&L

34. HTM + LAR  amortized cost

35. AFS  FV through other comprehensive income (OCI)

36. Impairment rules

37. HTM and tainting rules12

39. Amortised cost for assets held for contractual cash flows and managed on this basis

40. Fair value for everything else

44. Exposure Draft on Fair Value Option for Financial Liabilities

45. No recognition of changes in credit spread of own debt instruments

46. Option to recognize the full change in fair value of financial liability if that reduces a measurement mismatch

47. EBF calls for non inclusion of subsequent changes in own credit through P&L

48. Frozen credit spread approach

49. Alternative solution: isolation of credit element of FV changes and posting through OCI14

51. IFRS currently do not allow provisioning on expected losses

52. The Basel II framework has been perceived as pro-cyclical and has led to calls for through-the-cycle provisioning starting at the point when loans are originated

53. EBF agrees on the “too little, to late” argument

54. EBF considers that new provisioning model under IFRS should be:

55. more forward-looking

56. consistent with risk management practices

57. based on information generated for regulatory purposes

58. cost efficient

59. aligned with the other components of the revised IAS 3915

61. Inclusion of expected credit losses in Effective Interest Rate (EIR)

62. Inconsistency with risk management practices and inapplicability of the model on open portfolios

63. Asymmetrical treatment of original estimations of expected losses and changes in expectations

64. Significant operational concerns of the ECFM

65. extremely complex proposal

66. implementation costs would significantly outweigh the perceived benefits

67. Exacerbation of pro-cyclicality 16

69. Determination of expected loss on a portfolio level

70. New model should not change the definition of amortized cost or the EIR calculation

71. It should separate the methodology for the recognition and presentation of interest income and credit losses

72. It should exclude credit losses from the application on the EIR

73. Methodology based on expected loss over the life of each portfolio

74. Treatment of impaired loans as in the current IAS 39

75. Impairment allowances built up to be used (not simply buffers)

76. Impairment allowances must be properly considered in the capital framework

77. ELLP model: a credible alternative to ECFM17

79. In particular, they do not enable banks to designate core/demand deposits as hedged items

80. Complex and restrictive effectiveness testing

81. EU hedge carve-out motivated by:

82. disproportionate and costly changes to ALM and accounting systems

83. resulting unwarranted volatility

84. Carve-out does not prohibit application:

85. individual companies may apply the ‘carved out’ provisions

86. EU Member State may make these provisions domestically mandatory18

88. Not yet a clear view of IASB proposals

89. Splitting approach

90. general hedging and financial items

91. portfolio hedge accounting and non-financial hedged items

92. Bifurcation by risks

93. Tentative “full” cash flow hedge accounting approach

94. A number of simplifications (documentation, etc) under examination19

96. Full Fair Value for all financial instruments with limited options for amortized cost

97. with FV changes reported in P&L or OCI

98. with OCI method differing from OCI under IFRS

99. Incurred loss + Allowances for credit losses to be applied to loans and debt securities held for long-term investment and to be estimated based on "expected losses“

100. Hedge accounting allowing hedging of specific risks

101. “Reasonably effective" hedging instrument

102. Qualitative analysis of effectiveness at inception20