4.8 Interaction between Basel II and International Accounting Standards

So far we have discussed credit risk management issues from the viewpoint of risk managers and supervisors. But a third perspective has to be considered: accountants view about credit risk. This topic is particularly relevant now for European banks due to the introduction of new IAS/IFRS accounting principles and the consequent potential concerns for their consistency with supervisors and risk managers objectives. We should first note that while accounting standards (in particular FAS 5 and 114 in the United States and IAS 39 for IAS/IFRS-oriented countries) are focused on the accounting concept of impairment, supervisors are concentrated on default. Different definitions are summarized in Table 4-10. ^[14.] While these definitions are similar, they are not identical. At least potentially, in early years of application of IAS/IFRS (whose final version was issued in 2004, while FAS 114 dates back to 1993) there may still be some debate concerning whether a borrower moving close enough to default (e.g., by being downgraded in low internal rating classes that are adjacent to default or by being identified as a dangerous borrower by the internal monitoring system, which for smaller borrowers is usually based on a behavioral score only) may be a sufficient condition for impairment or whether impairment on an individual borrower should be considered to have occurred only in case of default.