An Investigation Into the use of Accounting Information in Bank Regulation: The South African Case

Abstract

Accounting (specifically fair value accounting) has been named by some as a role player in the financial crisis. The defensive argument that accounting is only a messenger ignores the important roles of accounting in banking and bank supervision. A second related argument is that prudential filters under the Basel Accords neutralise most fair value accounting gains and losses. Using South Africa, at that time subject to Basel II and IAS 39 Financial Instruments (in the year 2010), as a representative case, this study triangulates evidence from a questionnaire, a key informant interview and regulatory publications to investigate the role of accounting in bank supervision and to test whether all fair value gains and losses are neutralised. It is found that fair value gains or losses through profit and loss are not neutralised. A disconnect between the need of regulators for prudent information and the neutral information that accounting provides is identified. The significance of the results is that it is not impossible that fair value accounting played a role in the financial crisis, tempered by the fact that only South African evidence was considered.