On July 7, the Council of the European Union (the “Council”) adopted several conclusions regarding pro-cyclicality. The Council appeared to structure its conclusions around certain policy responses to pro-cyclicality provided in the report of a working group created by the Council’s Economic and Financial Committee. The policies include: “i) the monitoring of system-wide risks; ii) the building of counter-cyclical buffers through capital and provisions; iii) the improvement of accounting rules, and iv) the establishment of a sound framework for remuneration schemes.”
With regard to monitoring system-wide risks, the Council discussed the importance of monitoring risks as well as using the recommendations from monitoring to develop “concrete policy actions where appropriate.”
With regard to counter-cyclical buffers, the Council expressed support for “forward-looking provisioning” and the recognition of expected losses. In addition, the Council stated that “further work is necessary to mitigate pro-cyclicality by creating counter-cyclical capital buffers, i.e. to be raised in good times and to be drawn down in downturns.”
With regard to current accounting rules, the Council described potential adjustments in valuation methods. Specifically, for mark-to-market valuation, the Council stated that “mark-to-market valuation of many categories of financial instruments should be reviewed and adjusted as appropriate, particularly taking into account the uncertainty of valuations, the reality of the business model of banks, the holding horizons and the actual liquidity of markets.” Additionally, the Council urged the International Accounting Standards Board to review and amend IAS39, which addresses the recognition and measurement of financial assets.
Finally, with regard to remuneration schemes, the Council recognized the work of the Financial Stability Board, the Committee of European Banking Supervisors and the European Commission and urged member states to implement the recommendations of the European Commission.