New directive to impact banks' retained earnings

The directive is expected to significantly improve the standards for measurement and disclosure of credit risks.

bank earning pic 88 298 (photo credit: Ariel Jerozolimski)
bank earning pic 88 298
(photo credit: Ariel Jerozolimski)
The Bank of Israel's Banking Supervision Department is ordering banks and credit-card companies to implement more comprehensive disclosure requirements of credit risks in their financial statements by 2010, which is poised to have an effect on the banks' retained earnings. "Implementation of the new financial reporting directive on the measurement and disclosure of impaired loans and debt securities, credit risk and the allowance for credit losses will upgrade transparency over risk management and capital adequacy in the banking system to comply with most advanced reporting standards," Moshe Sharabi, head of the Bank of Israel's financial reporting division told The Jerusalem Post Tuesday. "However, only in 2010 will we be able to see the impact of the directive on banks' profits." The Banking Supervision Department at the central bank noted that, to date, no estimates of the effect of implementation of the directive on banks' retained earnings and profits had been received from the banks. Since implementation of the new directive will be fully adopted starting in January 2010, the Banking Association of Israel said in response that it was too early to measure the effects. The new directive aligns the financial reporting directives of the Supervisor of Banks with the financial accounting standards and disclosure requirements applicable to banks in the US and other developed economies. As such, the directive provides a uniform basis for international comparison. "As a result, users of financial statements, including analysts, rating agencies, foreign banks, supervisory authorities abroad and other international institutions, will be able to analyze the financial statements of Israel's banking corporations more easily, and to compare them with those of foreign banks," Sharabi said. In practice, the directive is expected to significantly improve the standards for measurement and disclosure of credit risks in the financial statements of banks and their credit-card subsidiaries. Moreover, the central bank said the change to the directives would improve the banking corporations' ability to monitor and manage credit risks, increase the uniformity and consistency of the measures of expected credit losses, and provide a stronger link between changes in credit quality and changes in the allowance for credit losses. According to the guidelines of the new directive, banks will be obliged to add to their financial statements the classification of loans and off-balance-sheet instruments (such as guarantees) in accordance with their risk level, including substandard and impaired credits, as well as loan write-offs and recognition of interest income. Financial statements will also need to incorporate the calculation of expected credit losses, with separate reference to large loans and groups of small loans, and controls over this process, in addition to disclosure of credit-quality information and methods used to measure expected loan losses. The new directive is in line with the disclosure requirements in Basel II, and thus brings Israel's banking system a step closer to the objective of adopting the Basel II principles in 2009.