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Breakingviews: Europe stands firm on derivative disclosures

Source: www.breakingviews.com is Europe's leading financial commentary service

Date: August 2003

By Christopher Hughes

The International Accounting Standards Board has locked horns with the European financial services industry. At issue is whether Europe's banks will adopt a new international accounting standard forcing them to disclose the market value of their derivatives holdings, as US banks have done for years.

The banks' attempts to fight the proposal are getting more desperate. French president Jacques Chirac has waded in on their behalf, threatening the ultimate action: preventing the new standard being enshrined in European law.

The idea that banks should disclose the fair value of derivatives is controversial because it would introduce an element of mark-to-market accounting into their balance sheets. These record most assets and liabilities at historical cost. The assets are typically long-term loans; the liabilities typically short-term deposits. The latter fund the former, and the bank makes a margin in the middle. Derivatives enter the equation because banks use them to hedge that margin against changes in interest rates.

Banks are scared that investors and ratings agencies might react adversely if they are forced to disclose the market value of their large derivative holdings - and the swings in the value of these holdings.

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