Commentary: How accounting information is used by the South African Bank Regulator

Abstract

Fair value accounting has been named by some as a role-player in the recent financial crisis. The initial defensive argument that accounting is only a messenger is easily dispelled by considering its vital role in banking and bank supervision, as well as its real-world implications. Yet, a second argument deserving further scrutiny states that prudential filters under the Basel Accords neutralise most fair value accounting gains and losses, which limits this source of volatility. Using South Africa as a representative case, this study compares evidence from (1) a questionnaire, (2) a key informant interview and (3) regulatory publications to investigate the use of accounting information in bank supervision, and to test whether all fair value gains and losses are, in fact, neutralised. This study found that fair value gains and losses through profit and loss (under IAS 39 (2010)) have not been neutralised by the South African regulator in its application of the Basel II framework since January 2008. A strong disconnect between the need for prudent information by regulators and the neutral information provided by accounting is also identified. Significantly, the results of this study dispel a core argument which so far has helped to shield fair value accounting from blame, but the importance is tempered by the fact that only South African evidence was considered.