Why did the international accounting standard setters make urgent changes to IAS 39 and IFRS 7?
The IASB (International Accounting Standards Board) acted under pressure from governments, most of all from the European Commission, which was threatening to suspend the application of IAS 39, which accounts for the bulk of the fair value accounting for the financial institutions that were being bailed out. As it happens, to reduce required regulatory capital, these institutions had put nearly all their securitised debt and structured debt products in their trading books; the market Value-at-Risk prescribed by the rules for bank capital didnt, after all, take into account the counterparty and liquidity risks that are, in fact, the main risks of instruments, and the institutions were taking advantage of this loophole. The downside of this regulatory arbitrage is that classifying these instruments as held for trading (rather than as held to maturity or loans and receivables, as they should have been) is now forcing financial institutions to price at fair value, in the profit and loss acc
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