An Analysis of the Impact of IFRS X on the Ability of Basel Ill to Reduce Systemic Risk

Abstract

A number of recent influential reports have identified off balance sheet financing as an important factor in the build up of systemic risk in the banking and finance sector during the period leading up to the Global Financial Crisis. The Basel Committee on Banking Supervision reacted to these reports and other pressure by unveiling Basel III as part of an extensive reform package, an important component of which is a number of measures designed to reduce the impact of off balance sheet financing on systemic risk. This paper identifies some concerns relating to the design of these measures and illustrates how reliance by the Committee on figures found in general purpose financial reports is questionable, as the International Accounting Standards Board has recently proposed modifying rules for consolidation accounting in ways which promote off balance sheet financing. This paper demonstrates how the Board’s proposals interact with Basel III in ways that are unlikely to reduce systemic risk.