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23rd December 2011

Own Debt fair value excluded from CT1 capital proposal

The Basel Committee on Banking Supervision issued a consultation document this week proposing that "all unrealised gains and losses that have resulted from changes in the fair value of liabilities that are due to changes in the bank's own credit risk" be excluded from the calculation of Core Tier 1 (CT1) capital. Note that the Committee proposes that "debit valuation adjustments (DVAs) for over-the-counter derivatives and securities financing transactions should be fully deducted in the calculation of Common Equity Tier 1".


Comments on the proposal to the amendment of Paragraph 75 of the Basel III rules must be provided by 17th February 2012.


The Basel Committee does not set accounting standards. Contrary to some media reports the Basel III proposal will not alter the wild swings in profit shown in banks' reports and accounts caused by change in debt value. Many countries in Europe and Asia report to International Finance Reporting Standards set by the International Accounting Standards Board. Earlier this year the Board proposed that such fair value changes be reported as other comprehensive income and hence removed from the income statement and the calculation of net (attributable to shareholder) profit. This proposal will take some years to phase in however.